Pound Drops as Construction Adds to Slowdown Signs; Gilts Slump

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The pound fell versus the dollar as a report showed U.K. construction slowed more in November than analysts predicted, adding to signs stagnation in the euro area is hampering the fastest-growing economy in the Group of Seven.

Sterling approached its lowest level since September 2013 against the U.S. currency as Markit Economics Ltd. said its purchasing managers index for construction output grew at the slowest pace in more than a year. U.K. government bonds fell before Chancellor of the Exchequer George Osborne sets out tax and spending plans in tomorrow’s Autumn Statement.

“The major risk and concern is the slowdown in Europe and how much of an impact that has on the U.K.,” said Peter Dragicevich, a currency strategist at Commonwealth Bank of Australia in London. “It’s still a positive-dollar story. On the crosses it should hold up.”

The pound fell 0.6 percent to $1.5637 at 4:43 p.m. London time after sliding to $1.5586 yesterday, the lowest since September 2013. Sterling was little changed at 79.21 pence per euro. It touched 79.77 pence yesterday, the weakest level since Nov. 21.

Britain’s currency will be little changed at about $1.57 in the first quarter of 2015, CBA’s Dragicevich said. That’s in line with the median of analysts’ predictions compiled by Bloomberg News.

Output Slows

The construction PMI fell to 59.4 last month from 61.4 in October, Markit said today. The median estimate in a Bloomberg survey of economists was for a reading of 61. A gauge of housing dropped to 60.3 from 61. While both measures are above the 50 mark that divides expansion from contraction, they are at their weakest since October 2013.

Ten-year gilt yields climbed seven basis points, or 0.07 percentage point, to 1.97 percent. The 2.75 percent bond due in September 2024 fell 0.68, or 6.80 pounds per 1,000-pound face amount, to 106.88. The rate dropped to 1.86 percent yesterday, the lowest since May 2013.

The Debt Management Office will sell 127.2 billion pounds of bonds in the fiscal year ending in March 2015, unchanged from plans made earlier this year, according to the median estimate of 18 primary dealers that trade directly with the agency. It will publish its revised financing plans after Osborne presents his end-of-year outlook to the U.K. Parliament in London starting at 12:30 p.m. tomorrow.

Budget Deficit

Gilts’ declines today pared a rally that has made them the best performers in the past six months among sovereign markets tracked by Bloomberg, as investors judge that deteriorating public finances will push borrowing needs higher in coming years.

Far from narrowing as officials predicted in March, the budget shortfall has widened since April as the recovery has failed to lift tax receipts. With stagnation in Europe weighing on the U.K. economy, the Office for Budget Responsibility could add as much as 75 billion pounds to its deficit projections for the next five years, according to UBS Group AG.

“There is a bit of a snap back” after recent gains pushed yields lower, said Vatsala Datta, a strategist at Royal Bank of Canada in London. “There is a bit of defensive positioning ahead” of the Autumn statement, Datta said.

Gilts earned 8.4 percent in the past six months through yesterday, according to Bloomberg World Bond Indexes. That compares with 4.4 percent for German securities and 2.3 percent for U.S. Treasuries.

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