By Lukanyo Mnyanda June 11 (Bloomberg) -- The pound fell against the dollar and the euro after U.K. manufacturing unexpectedly weakened in April, fueling concern the economic recovery will flounder as the government cuts spending to tame the budget deficit. Sterling pared its first weekly gain since April against the dollar as another report showed the cost of goods at factory gates rose at a slower pace last month than economists predicted. Gilts rose. “I’m still very skeptical about sterling, at least in the short term,” said Niels Christensen, a foreign-exchange strategist at Nordea Bank AB in Copenhagen. “I don’t think the economic recovery is that strong. The spending cuts from the new government are bound to slow the economy.” The pound lost 0.6 percent to 82.93 pence per euro as of 2:28 p.m. in London, erasing its weekly advance. It was 1 percent lower versus the dollar, at $1.4574, leaving its weekly gain at 0.8 percent. The yield on the two-year gilt fell four basis points to 0.83 percent while that on the 10-year security declined six basis points to 3.5 percent. The two-year yield recouped losses that pushed the yield to 0.89 percent yesterday, the most since June 4. Factory output fell 0.4 percent from March, the Office for National Statistics said today in London. Economists estimated it would increase 0.5 percent, according to a Bloomberg survey. Cost of Goods The cost of goods at factory gates rose 0.3 percent on the month in May, the least in three months and less than the 0.5 percent median forecast in a Bloomberg survey, signaling the recovery may ease amid a public-spending squeeze. The pound has fallen 9.8 percent versus the dollar this year, partly on concern the country would struggle to narrow the biggest budget shortfall among the Group of Seven nations. While the new government of Prime Minister David Cameron has made slashing spending a priority, investors are now speculating the cuts will slow the economy as it recovers from the worst recession on record. Chancellor of the Exchequer George Osborne is scheduled to present an emergency budget on June 22. “Much, much more needs to be done” to cut the deficit, Moritz Kraemer, head of the sovereign ratings group for Europe, Middle East and Africa at Standard & Poor’s, said in a Bloomberg Television interview on June 8. The pound declined even as a Bank of England report showed Britons’ inflation expectations climbed to the highest since August 2008. Consumers predicted inflation of 3.3 percent in a year’s time, according to a survey for the three months to May, the central bank said today. That compares with expectations of an increase of 2.5 percent in February. Energy Costs Bank of England Deputy Governor Charles Bean said this month the aftermath of the slowdown will counter inflation pressures from higher energy costs and a weaker pound. The 10-year breakeven rate declined nine basis points this week to 292 basis points. The rate, which measures the yield difference between regular and index-linked bonds and anticipates consumer-price growth during the next decade, has dropped from 325 basis points on April 21. The central bank yesterday kept the benchmark interest rate at a record low of 0.5 percent and held its bond-purchase program at 200 billion pounds ($294 billion). --With assistance from Jennifer Ryan and Thomas Penny in London. Editors: David Clarke, Peter Branton. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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