By - Jan 28, 2011 10:57 PM GMT+0800
The pound fell against the dollar as a report showed consumer confidence dropped the most in almost two decades in January after an increase in sales tax reduced spending power.
The pound also declined against the yen and the Swiss franc on speculation the Bank of Englandmay not be able to raise interest rates to fight inflation as growth slows. GfK NOP Ltd.’s index of sentiment fell 8 points from December to minus 29, the lowest since March 2009. Prime Minister David Cameron today reasserted his commitment to eliminate the nation’s budget deficit at the World Economic Forum in Switzerland.
“This low level of confidence is really associated with economic contraction,” said Michael Derks, chief strategist at FxPro Financial in London. “The early part of this year is going to be a messy one for sterling, caught between the high inflation numbers and disappointing growth readings.”
The pound fell 0.2 percent to $1.5890 as 2:54 p.m. in London. Against the euro, it was little changed at 86.26 pence, heading for a 1.2 percent loss this week. One pound fetched 130.80 yen, from 132.07 yen yesterday.
The pound has fallen 7 percent against nine of its developed-nations peers in the past 12 months, according to Bloomberg Correlation-Weighted Currency Indexes.
U.K. government bonds were little changed, erasing earlier gains, after data showed U.S. economic growth accelerated in the fourth quarter. The yield on the 10-year gilt was 3.69 percent. Two-year yields climbed three two points to 1.29 percent.
Inflation Expectations
Gross domestic product of the world’s largest economy expanded at a 3.2 percent annual pace from October through December, falling short of the 3.5 percent median forecast of 85 economists surveyed by Bloomberg News.
U.K. gilts handed investors a 2.2 percent loss this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. It underperformed German bonds and Treasuries which lost 1.67 percent and 0.14 percent respectively.
The U.K. 10-year breakeven rate, a market gauge of inflation expectations derived from the yield gap between nominal and index-linked bonds, rose two basis points to 3.21 percentage points. It rose eight basis points this week.
Short-sterling futures, which traders use to bet on the direction of central bank rates, declined, with the implied yield on the December 2011 contract two basis points higher at 1.52 percent.
Contraction ‘Expected’
Today’s data added to concerns that the U.K. government’s austerity measures will hurt growth. The country’s gross domestic product unexpectedly shrank 0.5 percent in the three months through December after increasing 0.7 percent in the previous quarter.
Cameron said this week’s news that the economy went into reverse at the end of last year was to be expected.
“Yes, they were partly driven by the terrible weather which shut down airports, factories and schools but let’s be frank,” Cameron said in a speech to the World Economic Forum at Davos, Switzerland. “They also brought home something we have said for months: given the traumas of recent years, the recovery was always going to be choppy.”
The pound may decline against the dollar toward the lowest level in more than four months, Gaitame.com Research Institute Ltd. said, citing chart patterns.
Bollinger Band
Should the pound fail to rise beyond the higher range of a so-called Bollinger band at $1.6148, the next support will be the currency’s 60-day moving average of $1.5745, said Tsuyoshi Okada, managing director at Gaitame.com. If the currency breaks that level, it may fall to $1.54, he said, which is near the level of $1.5345 marked on Dec. 28, the lowest since Sept. 8.
“Speculation of a rate increase has driven the pound to the $1.60 level,” Okada said in Tokyo. “If you look at the consumer-price index, the pound may be a buy, but if you look at the U.K. economy, it’s bad enough to make you turn pale.”
Bollinger bands are designed to alert investors when a security rises too high or falls too low by comparing its price to the average level over the past 20 days. The system of analysis was created in the 1980s by John Bollinger.
To contact the reporter on this story: Anchalee Worrachate in Londonaworrachate@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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