The pound held within a penny of a three-week low against the dollar and gilts fell before finance minister George Osborne addresses parliament on the economy amid market turmoil and the worst British riots in 30 years. Sterling strengthened against the euro. Osborne, the Chancellor of the Exchequer, is expected to defend the steepest government spending cuts since World War II as Europe’s debt crisis deepens. Opposition politicians may seek to take advantage of a Bank of England warning yesterday that the economic outlook is worsening as they call for a roll back of austerity measures. “The big risk to the pound is political,” Mark Schofield, head of interest-rate strategy at Citigroup Inc. in London, said by telephone yesterday. “There are a lot of tensions in the government.” The pound traded at $1.6159 at 12:30 p.m., from $1.6134 yesterday, after earlier touching $1.6111, the weakest intraday level since July 20. Sterling appreciated 0.2 percent to 87.67 pence per euro, after falling as much as 0.4 percent to 88.27 pence. Britain’s currency was little changed at 123.84 yen. The two-year gilt fell, lifting the yield by two basis points to 0.57 percent. Yields on 10-year bonds were little changed at 2.47 percent. Osborne is to speak at about 1 p.m. in London at a special sitting of lawmakers called after riots, looting and arson in the capital spread to other cities this week in the worst British rioting since the 1980s. Prime Minister David Cameron is facing pressure to review his policy of cutting spending on the police following the civil unrest. ‘Credible Plan’ “The UK has a very credible austerity plan as far as markets are concerned but the problem is that if growth falls off dramatically, the government might need to back away from that plan to support the economy,” said Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA in London. Deputy Prime Minister Nick Clegg said this morning the government won’t water down the cuts. The central bank lowered its outlook for the economy yesterday and Governor Mervyn King said headwinds are intensifying “by the day.” The U.K. economy grew 0.2 percent in the second quarter, while manufacturing shrank in July. BNP Paribas expects the U.K. economy to grow 1.3 percent this year and 1.6 percent in 2012 “with risks to the downside for both forecasts due to global economic uncertainties,” Saywell added. The implied yield on short-sterling futures expiring in June 2013 rose two basis point to 0.95 percent. The yield fell 23 basis points yesterday as traders added to bets that benchmark rates will remain lower for longer. The benchmark FTSE 100 index (UKX) of shares fell 0.9 percent, reversing an earlier rebound from its lowest closing level in more than a year yesterday. To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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