Pound Declines After Retail Sales Unexpectedly Drop; Bonds Rise

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The pound weakened for the first time in four days versus the euro and U.K. 10-year government bond yields pared their biggest increase in almost two years as a report showed retail sales unexpectedly fell in March.

Sterling dropped the most in three weeks against the common currency. The pound was little changed versus the dollar after gaining Wednesday as minutes of the Bank of England’s latest policy meeting showed keeping interest rates at a record low was a “finely balanced” decision for a minority of officials.

Gilts also advanced as the U.K. Debt Management Office said it was reducing its planned issuance for 2015-2016 by 2.5 billion pounds ($3.75 billion) after separate data showed the government undershot its borrowing forecasts in the previous fiscal year.

“The retail sales are clearly disappointing,” said Jane Foley, a senior currency strategist at Rabobank International in London. “Yesterday’s minutes had created some talk in the market that the Bank of England could be hiking interest rates as soon as November. That reaction was overdone -- these weak data will make the BOE a bit cautious.”

The pound weakened 0.6 percent to 71.75 pence per euro as of 3:52 p.m. London time, the most since April 2. The U.K. currency was little changed at $1.5040 after climbing 0.7 percent on Wednesday. It touched $1.4566 on April 13, the least since June 2010.

Yields Drop

The benchmark 10-year gilt yield fell one basis point, or 0.01 percentage point, to 1.70 percent. The yield climbed 15 basis points on Wednesday, the most since August 2013. The 5 percent bond due in March 2025 rose 0.125, or 1.25 pounds per 1,000-pound face amount, to 129.85. The two-year yield dropped four basis points to 0.52 percent on Thursday after increasing nine basis points a day earlier.

Investors are ruling out any increase to borrowing costs before at least the middle of next year, Sonia forward contracts show.

The volume of sales including auto fuel fell 0.5 percent from February, the Office for National Statistics said in London Thursday. Economists forecast a 0.4 percent increase, according to the median estimate in a Bloomberg survey. Sales excluding auto fuel rose 0.2 percent, also less than analysts forecast.

Separate figures showed the budget deficit in the fiscal year ended March narrowed more than officials had predicted. That prompted the DMO to reduce its planned gross gilt issuance for the 2015-2016 fiscal year to 130.9 billion pounds from 133.4 billion pounds previously. Planned Treasury bill issuance remains 7 billion pounds, the DMO said in a statement.

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