U.K. Pound Weakens to Nine-Month Low Versus Euro; Gilts Decline

The pound weakened to a nine-month low against the euro as investors favored assets in the 17-member currency region, betting they will outperform those in the U.K.

Gilts dropped for the first time in five days as Spanish and Irish borrowing costs declined at debt sales, damping demand for safer assets. Sterling also declined against the euro as U.K. Prime Minister David Cameron prepares to give a speech in the Netherlands tomorrow in which he’ll call for the U.K. to get powers back from the European Union. The pound fell for a fifth day versus the dollar.

“It’s a story of euro strength,” said Steven Barrow, head of Group-of-10 research at Standard Bank Plc in London. “Against the pound what tends to drive that is not just an improvement in sentiment towards the euro and the euro-zone crisis, but also a sense that if this pressure continues to lift, money-market conditions may tighten in the euro zone.”

Sterling depreciated 0.7 percent to 83.58 pence per euro at 4:30 p.m. London time, after reaching 83.65 pence, the weakest since March 29. The pound slid 0.2 percent to $1.5976 after dropping to $1.5955, the least since Nov. 23.

The U.K. economy contracted in the fourth quarter and may risk slipping back into recession in the first three months of 2013, according to an e-mailed report from London-based Fathom Financial Consulting today.

‘Underlying Weakness’

“Whether growth in Q4 turns out to have been slightly positive, or slightly negative, the picture remains one of underlying weakness,” the report said. “Whichever way you look at it, the U.K. economy continues to bump along the bottom.”

The National Institute of Economic and Social Research, whose clients include the Bank of England and the U.K. Treasury, estimate Britain’s economy contracted 0.3 percent in the fourth quarter, it said on Jan. 11.

“In sterling there’s a lot of weakness coming through,” said Eimear Daly, a currency-market analyst at Monex Europe Ltd. in London. “I think we are going to see it much lower. As the safe-haven trade wears off, people are starting to look at the fundamentals of the U.K. economy.”

She spoke in an interview on Bloomberg Television’s “The Pulse” with Guy Johnson.

The pound has lost 1.8 percent this year, the third-worst performance after the Japanese yen and Swiss franc, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro advanced 1.4 percent and the dollar was little changed.

‘Growing Uncertainties’

“One factor behind sterling underperformance may be the U.K. political outlook, and specifically the growing uncertainties surrounding the country’s relationship with the EU,” Shahab Jalinoos, a senior currency strategist for UBS AG in Stamford, Connecticut, wrote in e-mailed report. “That this is happening at time when political risk is diminishing in the euro area is a further problem for the pound as it may lead to a reversal of safe-haven flows seen in 2011-2012.”

Business Secretary Vince Cable will say in a speech today Cameron would put the economy at risk if he raises the prospect of a British exit from the EU, according to his office.

Cameron’s stance is unlikely to weaken demand for the British currency, according to Nick Beecroft, chairman of Saxo Capital Markets U.K. Ltd.

“I’m struggling to find a market relevance with regards to the U.K.’s position vis-a-vis the EU,” Beecroft said at a presentation in London today. “The only thing that could bring sterling dramatically down is an about-face from the government with regards to the austerity plan.”

Gilts Fall

The 10-year gilt yield climbed four basis points, or 0.04 percentage point, to 2.04 percent after falling to 1.98 percent yesterday, the lowest level since Jan. 3. The 1.75 percent bond maturing in September 2022 dropped 0.36, or 3.60 pounds per 1,000-pound face amount, to 97.475.

The Debt Management Office sold 1 billion pounds of inflation-linked securities maturing in 2029 at a so-called real yield of minus 0.367 percent.

The yield on U.K. 10-year index-linked gilts climbed four basis points to minus 1.03 percent, after earlier dropping to a record low of minus 1.08 percent.

Gilts handed investors a loss of 1.2 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds also dropped 1.2 percent and Treasuries fell 0.2 percent.

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