Pound Headed for Weekly Drop as Manufacturing Index Declines

By Agnes Lovasz

Aug. 1 (Bloomberg) -- The pound headed for its biggest weekly drop against the dollar since mid June as U.K. manufacturing shrank by the most in a decade, adding to evidence a recession is looming.

An index based on a survey of more than 600 manufacturers by the Chartered Institute of Purchasing and Supply dropped to 44.3 in July, the lowest since December 1998, from 45.9 the previous month. The U.K. currency extended its drop after British Energy Group Plc, the nation's biggest nuclear-power producer, rejected a takeover approach from Electricite de France SA, according to people with knowledge of the talks.

``The news you're getting about the British economy goes only in one direction,'' said Lutz Karpowitz, a Frankfurt-based currency strategist at Commerzbank AG, Germany's second-biggest lender. ``The economy is very weak and we don't see signs of a recovery. The pound is going to get weaker against the euro and the dollar.''

The pound slipped to $1.9781 by 12:42 p.m. in London, from $1.9841 yesterday, bringing it weekly drop to 0.8 percent. The British currency was at 78.72 pence per euro, from 78.64, gaining 0.2 percent in the week.

The U.K. currency will slide to 82 pence per euro and $1.96 by the end of the March, before recovering, Karpowitz said.

Retail visits fell 2.6 percent from a year earlier, Experian Group Ltd. said today in an e-mailed report. The company forecasts sales volumes in the next 12 months will be ``the slowest period since the early 1990s,'' according to the report.

Gilts Decline

U.K. government bonds were little changed. The yield on the 10-year gilt was 4.81 percent. The 5 percent security due March 2018 dropped 0.03, or 30 pence per 1,000-pound ($1,978) face amount, to 101.47. The yield on the two-year gilt climbed 2 basis points to 4.81 percent. Bond yields move inversely to prices.

Bank of England policy makers left the nation's key interest rate unchanged at the past three meetings even as inflation accelerated to the fastest pace in 11 years. Prices rose 3.8 percent in June from a year earlier, almost double the central bank's 2 percent target. The bank next meets Aug. 7.

The pound has fallen 6.7 percent against the euro this year as tumbling house prices and accelerating inflation slowed the pace of growth.

The prospect of higher interest rates receded in the past month, with the implied yield on the December short-sterling futures contract at 5.76 percent today, from 6.21 percent a month ago. The contract rose 5 basis points today.

Gloomy Outlook

Britain's economic outlook has deteriorated in the past month after ``bad news'' on retail sales, Bank of England policy maker David Blanchflower, the only official to vote for a rate cut this month, said two days ago. U.K. house prices fell the most in nearly two decades in July and consumer confidence dropped to a record, reports showed yesterday.

Other reports this week showed mortgage approvals fell to the lowest since at least 1999 and an index of U.K. retail sales dropped to a 25-year low, house prices declined the most in almost two decades and consumer confidence slumped to a record.

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