The U.K. pound fell against the dollar after June’s budget deficit narrowed less than predicted, strengthening the case for the Bank of England to keep interest rates at a record low as the government cuts spending. Sterling weakened to more than 85 pence per euro for the second consecutive day before reversing losses. A central bank report today showed mortgage approvals fell in June, a day after a Rightmove Plc said U.K. home sellers cut prices for the first time this year. Gilts gained even as demand fell at a sale of 3.75 billion pounds ($5.7 billion) of 2016 bonds. The FTSE 100 Index of stocks dropped for a fifth day. “Some of the shine has come off sterling,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. “It seems clear that the Bank of England will stay where it is. It won’t be chasing rates higher.” Sterling lost 0.4 percent to $1.5167 as of 2:15 p.m. in London, after earlier advancing by as much as 0.5 percent. The pound gained 0.2 percent to 84.78 pence per euro, after being as weak as 85.32 pence. It breached 85 pence yesterday for the first time since May 31. The budget shortfall of 14.5 billion pounds compares with 14.7 billion pounds a year earlier, the Office for National Statistics said today. That surpassed the 13 billion-pound median forecast of 17 economists in a Bloomberg News survey. Business Confidence A quarterly business confidence gauge dropped to 10 from 24 at the last report in April, the Confederation of British Industry said today. The median estimate of three economists surveyed by Bloomberg was for a decline to 22. The yield on the two-year gilt decreased one basis points to 0.77 percent while that on the 10-year security was also two basis points lower, at 3.34 percent. The yield on the country’s 2.75 percent security maturing in January 2015 fell one basis point to 2.06 percent. “Sentiment is driving the market in terms of the equity move and gilts are going the opposite way,” said Orlando Green, an interest-rate strategist at Credit Agricole Corporate & Investment Bank in London. “The bond markets are looking at external factors and what the equity markets are doing.” Britain’s currency has declined 6.1 percent versus its U.S. counterpart this year partly on concern that the government will struggle to plug its deficit. It has rebounded 2.3 percent since June 22, when Chancellor of the Exchequer George Osborne outlined spending cuts to help tame the shortfall. Cash Measure A measure of cash entering and leaving the public sector showed a 20.9 billion-pound deficit in June compared with 20.2 billion pounds a year earlier, the statistics office said today. Economists predicted a 16 billion-pound shortfall, according to the median forecast in a separate Bloomberg survey. “In recent months we have seen the level of borrowing a little lower than the same month a year ago, so that improving trend has taken a pause for breath for now,” Alan Clarke, an economist at BNP Paribas SA in London, wrote in a client note. “Although disappointing on the month, that is drastically better than the situation in mid-2009 when borrowing was increasing by 10 billion pounds compared with the same month a year earlier.” The U.K.’s sale of 4 percent securities maturing 2016 attracted bids equivalent 1.38 times the amount on offer, down from a so-called bid-to-cover ratio of 1.7 times at an auction on July 21, 2009, the debt office data showed. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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