BS: Pound Weakens Second Day as Budget Deficit Widens; Gilts Decline
The pound weakened for a second day against the dollar after reports showed the U.K. budget deficit widened and consumer confidence unexpectedly declined, damping optimism the recovery is gaining momentum.
Sterling trimmed the first weekly advance versus the U.S. currency this month even after separate data confirmed that Britain’s economic growth accelerated 0.8 percent in the third quarter. The pound has still appreciated against all its 16 major counterparts during the past three months. U.K. government bonds fell, with benchmark 10-year yields climbing to the highest level since September.
“We’re coming out of the recession with an already very wide deficit,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “Normally we would have expected the deficit to have closed up somewhat but that hasn’t been the case so it does risk the deficit widening out once again. That could be a longer-term drag for sterling.”
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The pound dropped 0.1 percent to $1.6348 at 1:20 p.m. London time, paring this week’s increase to 0.3 percent. The U.K. currency fell 0.1 percent to 83.50 pence per euro.
The budget deficit excluding temporary support for banks expanded to 16.5 billion pounds in November versus 15.6 billion pounds a year earlier, the Office for National Statistics said. GfK NOP Ltd. said its consumer-sentiment index dropped to minus 13 this month from minus 12 in November. Economists surveyed by Bloomberg predicted an increase to minus 11.
Best Performer
The pound has gained 4.3 percent in the past three months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes amid speculation a strengthening economy will spur the Bank of England to increase interest rates. The euro appreciated 2.9 percent and the dollar rose 1.8 percent.
The yield on the benchmark 10-year gilt climbed three basis points, or 0.03 percent, to 2.99 percent, the highest level since Sept. 18. The 2.25 percent bond maturing in September 2023 fell 0.23, or 2.30 pounds, to 93.83. The rate has risen nine basis points since Dec. 13.
Gilts declined this week as data showed the U.K. jobless rate dropped to a four-year low of 7.4 percent in the three months through October, damping demand for safer assets. They also declined as the Federal Reserve said it would reduce monthly purchases of Treasuries and mortgage-backed securities to $75 billion from $85 billion.
“It’s been a week where we’ve seen a break out of a narrow range to the upside in yield,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “The combination of the strong labor market data in the U.K. and also the tapering decision by the Fed has pushed yields up.”
U.K. gilts handed investors a loss of 4.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities dropped 1.9 percent and U.S. Treasuries declined 3 percent.
To contact the reporter on this story: Eshe Nelson in London at enelson32@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
