Pound Drops as Declining Retail Sales Puncture BOE Speculation

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The pound fell to a one-week low against the euro after a report showed U.K. retail sales unexpectedly shrank in June, puncturing some of investors’ optimism about the strength of the economy and scope for higher interest rates.

Sterling weakened versus 13 of its 16 major peers as the Office for National Statistics said the volume of sales including auto fuel slipped 0.2 percent from May. Economists forecast an increase of 0.4 percent, according to a Bloomberg survey of economists.

The U.K. currency erased gains made Wednesday, when minutes of the Bank of England’s July meeting showed a growing number of policy makers had become concerned inflationary pressures are rising. That added to comments from Governor Mark Carney and fellow officials last week that helped bring forward investors’ outlooks for a rate increase.

“This data breaks the theme that we had in sterling in the last few weeks of upside surprises, in particular rates expectation on the back of rhetoric from Bank of England officials,” said Michael Sneyd, a foreign-exchange strategist at BNP Paribas SA in London. “Given that we’ve seen the big move in rate expectations and a rally in sterling in the last couple of weeks, this kind of set the market up to unwind some of that move.”

The pound depreciated 0.9 percent to 70.65 pence per euro as of 5 p.m. London time, and earlier touched 70.74 pence, the weakest level since July 14. Sterling tumbled 0.5 percent to $1.5533.

Investors expect rates to rise next May, compared with August 2016 as recently as July 10, according to forward contracts based on the sterling overnight index average, or Sonia.

U.K. government bonds rose, with the yield on 10-year gilts falling 2 basis points, or 0.02 percentage point, to 2.01 percent. The 5 percent security due in March 2025 advanced 0.2, or 2 pounds per 1,000-pound face amount, to 126.045.

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