Pound Falls Against Euro as Consumer Confidence Drops to Record

By Andrew MacAskill and Agnes Lovasz

July 31 (Bloomberg) -- The pound snapped two days of gains against the euro after U.K. consumer confidence dropped to a record low in July and house prices slumped more than forecast.

The British currency also weakened versus the Swiss franc after GfK NOP said its confidence index fell to minus 39, below the level reached on the eve of the 1990 recession. House prices fell 1.7 percent in July, Nationwide Building Society said today, the ninth consecutive monthly drop and more than the 1.2 percent predicted by analysts and economists.

``Another barrage of poor domestic data points to further weak economic activity and that is putting downward pressure on sterling,'' said Adam Cole, head of global currency in London at Royal Bank of Canada, which forecasts the U.K. currency will depreciate to 82 pence per euro by the end of the third quarter.

The pound slid to 78.82 pence per euro as of 8:48 a.m. in London, from 78.59 yesterday. It was little changed at $1.9813, from $1.9818.

The pound has fallen 6.8 percent against the euro this year as tumbling house prices and accelerating inflation slowed growth in Europe's second-biggest economy. The outlook has deteriorated in the past month after ``bad news'' on retail sales, Bank of England policy maker David Blanchflower said yesterday.

U.K. government bonds fell today, with the yield on the 10- year gilt rising 1 basis point to 4.85 percent. The price of the 5 percent security due March 2018 dropped 0.06, or 0.6 pounds per 1,000-pound ($1,980) face amount, to 101.13. The yield on the two-year gilt rose 2 basis points, to 4.83 percent. Bond yields move inversely to prices.

Traders increased wagers the Bank of England will lift interest rates, with the implied yield on the December short- sterling futures contract rising 4 basis points to 5.73 percent. The central bank has lowered the key interest rate three times since November, to 5 percent.

The faltering economy will weaken the pound to $1.90 and to 80 pence per euro by year-end, according to the median forecast of analysts and strategists surveyed by Bloomberg. The yield on the 10-year note will end the year at 4.89 percent, according to a separate survey.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net