Pound Falls to 17-Month Low as Construction Growth SlowsLucy Meakin
The pound fell to the weakest level in 17 months against the dollar as a report showed U.K. construction slowed in December more than economists forecast, undermining Britain’s recovery.
Sterling declined versus 13 of its 16 major peers as British politicians began their campaigns before parliamentary elections set to take place in May. A survey of polling experts in the Independent on Sunday newspaper found all who made a prediction saw another hung Parliament, where no party has a majority. U.K. government bonds climbed for a fifth day even as the nation prepared to auction 10-year debt tomorrow, the first gilt sale since Dec. 11.
“The data has been deteriorating steadily,” said Neil Mellor, a currency strategist at Bank of New York Mellon in London. “The market has been able to focus on the political risks relating to the election as well. We see cable at $1.49 in three months which already is looking quite conservative,” he said, referring to the pound-dollar exchange rate.
Sterling fell 0.6 percent to $1.5238 at 4:22 p.m. London time after touching $1.5176, the lowest since August 2013. The U.K. currency was little changed at 78.32 pence per euro.
Bank of New York’s Mellor predicts the pound will weaken to $1.40 by year end. The median prediction of analysts surveyed by Bloomberg is for sterling to rise to $1.55.
A gauge of U.K. construction declined to 57.6 in December from 59.4 a month earlier, according to Markit Economics. That’s below the median estimate of 59 in a Bloomberg News survey of analysts and above the 50 level that indicates expansion.
The construction data “adds to nervousness surrounding the pound,” BNP Paribas SA analysts led by Steven Saywell in London wrote in a note to clients. “In the short term, GBP appears vulnerable to further weakness especially versus a resurgent USD,” they wrote, referring to the pound and dollar.
The Debt Management Office plans to sell 2.75 billion pounds of benchmark gilts tomorrow and 950 million pounds of inflation-linked debt due in March 2044 a day later.
“We’ve got two auctions this week after a three-week hiatus in supply,” said Jason Simpson, a U.K. rates strategist at Societe Generale SA in London. “Into year-end, one of the reasons yields squeezed down so low was just this environment of limited issuance.”
The 10-year gilt yield fell five basis points, or 0.04 percentage point, to 1.67 percent today, and touched 1.656 percent, the lowest level since May 2013. The 2.75 percent bond due in September 2024 rose 0.485, or 4.85 pounds per 1,000 pound face amount, to 109.645.
The rate on 10-year gilts will climb to 2.75 percent by the end of this year, according to the median of estimates compiled by Bloomberg.
The U.K. last sold 10-year gilts at an average yield of 2.205 percent on Nov. 13, up from 2.149 percent at a previous sale on Oct. 21.
U.K. sovereign debt returned 15 percent last year, outperforming U.S. and German securities, according to Bloomberg World Bond Indexes, as investors pushed back bets of higher interest rates by the Bank of England and growth stalled in the euro area.