Pound Weakens on Housing, Trade Data as BOE Holds Rate

The pound fell against the dollar as Bank of England policy makers kept interest rates at a record low while trade deficit and housing data fell below economists’ estimates.

Sterling slid against most major peers as Associated British Foods Plc and Burberry Group Plc said the past year’s best-performing major currency is cramping growth. The 10-year gilt yield dropped to a five-week low as banking woes in Portugal rekindled the specter of euro-area financial instability, boosting demand for the safety of U.K. debt.

“We saw more evidence today that activity in the U.K. housing market appears to be easing off and also the trade report showed recent deterioration in the trade deficit has continued,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Both of those factors are weighing modestly on the pound.”

The pound declined 0.2 percent to $1.7125 at 4:40 p.m. London time after climbing to $1.7180 on July 4, the highest since October 2008. Sterling was little changed at 79.46 pence per euro. It touched 79.15 pence on July 7, the strongest level since September 2012.

Rate Expectations

The currency surged 11 percent in the past year as investors bet the Bank of England will be the first major central bank to end extraordinary stimulus measures, making it the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 1.3 percent and the dollar slipped 3.9 percent.

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting it will increase 25 basis points by February. All 47 economists surveyed by Bloomberg predicted the BOE would leave its benchmark rate at 0.5 percent today.

An index of U.K. house prices slipped to 53 in June, a four-month low, from a revised 56 in May, the Royal Institution of Chartered Surveyors said today. The U.K. trade deficit was 9.20 billion pounds in May, the most in four months, according to the Office for National Statistics. Economists surveyed by Bloomberg forecast a gap of 8.75 billion pounds.

The figures underscore the challenge facing the British government as it tries to rebalance the recovery toward trade in the face of an appreciated pound and a fragile recovery in the euro region, the biggest market for British goods.

Corporate Challenge

Burberry, the nation’s largest luxury-goods maker, said today if exchange rates stay at current levels, that would reduce annual retail and wholesale profit by about 55 million pounds and trim the adjusted operating margin to about 16 percent. Associated British Foods Plc also cited the strength of sterling as pushing down sales.

Gilts advanced along with German bunds amid concern that banks remain vulnerable as the euro region emerges from the sovereign-debt crisis. Shares in Portugal’s Banco Espirito Santo SA tumbled today after a delay in payments of some short-term debt securities issued by its parent company.

Ten-year gilt yields fell three basis points, or 0.03 percentage point, to 2.63 percent today after reaching 2.58 percent, the lowest since June 2. The 2.25 percent bond maturing September 2023 rose 0.26, or 2.60 pounds per 1,000-pound face amount, to 96.95.

The yield difference investors demand to hold 10-year gilts over equivalent German bunds was 143 basis points, about six basis points from the widest level since the formation of the euro. The 10-year bund yield declined three basis points to 1.20 percent today.

“People looking around and hunting for a little bit of yield in the conservative end of the bond market, given that they are not so risk on at the moment, will probably look at the gilt market,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. “On a relative basis the spread over bunds looks attractive.”

Gilts returned 3.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities earned 5 percent and Treasuries gained 3.1 percent.

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