Pound Declines Amid Speculation Economic Recovery to Be Uneven

By Lukanyo Mnyanda

The pound reversed gains that pushed it last week to the strongest level in five months. Lloyds Banking Group Plc’s Halifax division may say this week that U.K. house-price growth slowed to 0.7 percent last month, from 1 percent in December, according to the median forecast of 10 economists in a Bloomberg survey. The Bank of England will keep the benchmark interest rate at 0.5 percent this week, according to all 61 economists surveyed by Bloomberg.

“From a fundamental point of view, there was no justification for the pound rally that we saw against the euro,” said Ulrich Leuchtmann , head of currency strategy at Commerzbank AG in Frankfurt. “The U.K. is still in a difficult phase of the business cycle.”

The pound fell 0.2 percent to 87.43 pence per euro as of 2:45 p.m. in London. It strengthened to 86.03 pence on Jan. 28, the strongest level since Aug. 20. Sterling fell 0.1 percent to $1.5950.

The pound declined 1.5 percent against the dollar this year amid speculation the U.K.’s recovery will lag behind that of other major economies. The housing market pickup will slow this year as banks curtail mortgage lending and a Shortage of supply limits transactions, the Association of Mortgage Intermediaries said yesterday.

Construction Index

Britain’s currency stayed weaker today even as an Index of construction unexpectedly gained last month. The construction gauge increased to 48.6 from 47.1 in December, Markit Group Ltd. and the Chartered Institute of Purchasing and Supply said in a statement in London today, beating economists’ forecasts.

Ten-year bonds were little changed, with the yield holding at 3.09 percent. The two-year yield fell 2 basis points to 1.20 percent.

An earlier decline in Gilts after the construction report may have been a “knee-jerk reaction,” said Nick Stamenkovic , a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and investors.

A government sale of 3.75 billion pounds ($6 billion) of 2012 bonds attracted bids equivalent to 3.1 times the amount on offer, up from a so-called bid-to-cover ratio of 2.1 times at a sale in September. The government is selling a record 225 billion pounds of Gilts in the fiscal year through March.

Gilts returned investors 0.9 percent this year, compared with a 1.5 percent gain for German government bonds and 1.4 percent for U.S. Treasuries, according to Indexes compiled by Bank of America Corp.’s Merrill Lynch unit.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net