By Gavin Finch Dec. 9 (Bloomberg) -- The pound dropped against the dollar and the euro after an industry report showed sales of U.K. homes slipped to the lowest level since at least 1978 as the economy plunged deeper into a recession. The pound snapped a two-day gain against the U.S. currency as separate data showed retail sales fell in two consecutive months for the first time since at least 1995. The Bank of England last week cut its benchmark interest rate to 2 percent, the lowest level in a half-century. Traders are raising bets policy makers will lower it more than a quarter point in January. “I think it’s going to be a pretty bleak Christmas,” said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. which holds $23 trillion as the world’s largest custodian of financial assets. “Sterling weakness will continue to kick-in because rates here will be cut more dramatically.” The U.K. currency weakened as much as 1.2 percent to $1.4743 and was at $1.4810 by 10:56 a.m. in London. It depreciated 0.1 percent to 86.99 pence per euro. The pound will weaken to 90 pence in coming weeks, Derrick predicted. Real-estate agents and surveyors sold an average of 10.6 homes a month each in the quarter through November, the least since the series began three decades ago, RICS said. Sales at British retail stores open at least 12 months dropped 2.6 percent in November from a year earlier, the British Retail Consortium said today. That’s the first back-to-back annual decline since the survey began 13 years ago. U.K. Manufacturing The pound stayed lower after the Office for National Statistics said factory production dropped almost three times as much as economists forecast in October, extending its worst contraction since 1980. Manufacturing output fell 1.4 percent from September, the ONS said. The median estimate of 22 economists surveyed by Bloomberg was for a 0.5 percent drop. Production slipped for an eighth month, the longest run since the 1980 recession, when Margaret Thatcher was prime minister. Britain’s currency is on course to lose a quarter of its value versus the dollar this year, the steepest annual loss since at least 1972, as the deteriorating economy persuaded policy makers to pare borrowing costs to the lowest level since 1951. A Credit Suisse Group AG derivatives index suggests traders are betting the central bank will cut its main rate by at least 25 basis points on Jan. 8. Gilts rallied after the reports, with the yield on the two- year note slipping six basis points to 1.89 percent. The 4.75 percent security due June 2010 climbed 0.08, or 80 pence per 1,000-pound ($1,481) face amount, to 104.19. The yield on the 10- year gilt fell three basis points to 3.55 percent. Yields move inversely to bond prices. To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

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