BLBG: U.K. Pound Declines as Service Industry Growth Slowed in June
July 3 (Bloomberg) -- The pound fell against the dollar, capping its first weekly decline in a month, after a report showed the U.K. services industry grew at a slower pace in June.
The pound also dropped against the euro in the five days as the economy contracted more than forecast in the first quarter, denting optimism that has helped propel the pound 12 percent higher against the U.S. currency this year. Bank of England policy maker David Miles said yesterday that the U.K. banking industry “remains on life support.”
“The data is not strong enough to generate a more bullish outlook” for sterling, said Henrik Gullberg, a foreign-exchange strategist in London at Deutsche Bank AG, the world’s largest currency trader. “You could argue that there is a downside risk in pound-dollar because it’s overstretched.”
The pound fell 0.4 percent to $1.6333 as of 4:50 p.m. in London, contributing to a 1.2 percent decline in the week. It depreciated 0.3 percent to 85.62 pence per euro, giving it a drop of 0.7 percent this week. It also fell 0.4 percent this week to 156.72 yen.
An index based on a survey of about 700 service companies by the Chartered Institute of Purchasing and Supply fell to 51.6, from 51.7 in May. The median forecast of 29 economists surveyed by Bloomberg was for a reading of 51.5. A reading above 50 indicates an expansion.
The British economy contracted 2.4 percent in the first quarter, the most since 1958, the Office for National Statistics in London said June 30. Gross domestic product in the U.K. will shrink 4.3 percent this year, the Organization for Economic Cooperation and Development said last week, revising a March forecast for a 3.7 percent contraction.
U.K. Construction
A survey on U.K. construction added to evidence Britain’s economy is still in the midst of a recession. An index based on a poll of purchasing managers at building companies fell to 44.5 in June, from 45.9 in May, Markit Economics and the London-based Chartered Institute of Purchasing and Supply said yesterday.
The yield on the two-year gilt, which tends to be more sensitive to interest rate expectations than longer-dated debt, fell four basis points to 1.26 percent on speculation poor economic data may persuade the Bank of England to keep borrowing costs at a record low. The 4.25 percent security due March 2011 climbed 0.04, or 40 pence per 1,000-pound ($1,634) face amount, to 104.93. The yield rose 10 basis points in the week.
The 10-year gilt yield fell less than one basis point to 3.74 percent. The difference in yield, or spread, between two- and 10-year gilts expanded to 248 basis points, the widest this week. Yields move inversely to bond prices.
Debt Sales
The U.K. government will sell 4 billion pounds of 3.75 percent bonds due in 2019 on July 7. Prime Minister Gordon Brown’s administration will sell an unprecedented 220 billion pounds of securities this year as it seeks to fund bank bailouts and economic-stimulus measures.
The U.K. sold a record 5.25 billion pounds of 2014 debt on July 1, attracting investor bids for 2.56 times the amount offered. It also sold 2.5 billion pounds of 30-year bonds yesterday, with a bid-to-cover of 1.75.
“The dangers of indigestion remain acute,” John Wraith, head of sterling interest-rate products at RBC Capital Markets in London, wrote in a note today. “Market volatility, especially around the timing of auction and buyback announcements and operations, will remain high.”
Jobs Report
Government bonds around the world rose yesterday as investors sought the safety of fixed income following the U.S. employment report. Employers cut 467,000 jobs in June, while the jobless rate climbed to 9.5 percent, the highest since 1983, the Labor Department said. Economists forecast a 365,000 decline.
“Whilst a return to growth does seem plausible and policy is gaining traction in the economy, the idea that we will return to rapid growth that will be sustained over several years seems pretty unlikely,” Miles told Parliament’s Treasury Committee in London yesterday.
His comments echoed the ones made on July 1 by Rachel Lomax, a Bank of England former deputy governor. “The bad news is that neither the financial crisis nor the recession are over yet,” Lomax said in a speech.
U.K. government bonds lost investors 2.6 percent this year, compared with a 4.2 percent decline for U.S. debt and a gain of 0.2 percent for German bunds, according to Merrill Lynch & Co.’s U.K. Gilts, U.S. Treasury Master and German Federal Governments indexes.
The pound should be sold at $1.6435 because the Bank of England may expand asset purchases at its meeting next week, currency strategists led by Hans-Guenter Redeker at BNP Paribas SA in London wrote in a report today.
The central bank bought 6.5 billion pounds of government bonds maturing between 2015 and 2032 this week, bringing its total spending to 102.9 billion pounds in gilts so far.
It will buy 3.5 billion pounds of gilts maturing between 2020 and 2032 on July 6. It will also buy 3 billion pounds of debt due between 2015 and 2019 on July 8, part of a 125-billion pound quantitative-easing program designed to unfreeze credit markets.
