The pound dropped against the euro, snapping a two-day gain, after Bank of England policy maker David Blanchflower said he doubted whether the U.K. economy would grow this year or next.
The pound also slid after an industry report showed U.K. retail sales fell in May, a sign the recession may not yet be easing. The benchmark FTSE 100 Index advanced for the first time in three days. Blanchflower told the Times newspaper the British economy faces “many false dawns.”
“Blanchflower’s comments pour cold water on the risk rebound we’ve seen,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International. “We’d moved too far toward pricing in a recovery story. We’re having a bit of a reality check.”
The pound weakened to 87.46 pence per euro by 4:55 p.m. in London, after reaching 86.54 pence yesterday, the strongest since Feb. 10. It was little changed at $1.5947 after rallying to $1.6085 yesterday, the strongest since Nov. 5.
U.K. retail sales deteriorated in May and next month will remain “difficult” for stores as unemployment rises, the Confederation of British Industry said today.
A survey of retailers showed a net 17 percent reporting a drop in sales this month, compared with a net 3 percent saying sales rose in April, the nation’s biggest business lobby said. The group canvassed 80 retailers from April 28 to May 13.
IMF Forecast
The U.K. economy is likely to contract 4.1 percent this year and the government should reduce borrowing and keep a lid on spending, the International Monetary Fund said May 20 in its annual health check on the British economy. Chancellor of the Exchequer Alistair Darling forecast a decline of as much as 3.5 percent in his budget on April 22.
The British government should reduce borrowing and keep a lid on spending, the IMF said in its annual health check on the British economy.
The pound weakened earlier against the dollar as U.K. Business Secretary Peter Mandelson said General Motors Corp.’s financial restructuring will lead to job losses at its Vauxhall unit in Britain.
“The restructuring of the company to put it on a more stable footing will require losses of employment,” Mandelson said on Sky News today. He said he has assurances from the companies that they will maintain production of cars at Vauxhall.
The U.K. currency, which rallied 4.4 percent against the dollar in the past two weeks, was due a correction, according to the 14-day relative strength index. The gauge was at 73.35 today, from 74.81 yesterday. For the past seven days it has been above the 70 level that typically signals an asset is poised to fall.
U.K. government bonds dropped for a second day amid concern central bank efforts to end the recession by pushing down borrowing costs are failing.
The yield on the 10-year gilt rose six basis points to 3.80 percent, the highest since Feb. 11. The 4.5 percent note due March 2019 fell 0.39, or 3.9 pounds per 1,000-pound ($1,596) face amount, to 105.76.
