Pound Posts Monthly Loss as U.K. Consumer Confidence Stays Weak

By Lukanyo Mnyanda and Andrew MacAskill

Aug. 30 (Bloomberg) -- The pound fell to the lowest level in more than four months against the euro after a report showed consumer confidence held near a record low in August, strengthening the case for lower interest rates.

The pound also had its biggest monthly drop in almost 16 years versus the dollar yesterday after London-based research firm GfK NOP said a confidence index based on a survey of 2,001 people rose 3 points from July's minus 39, which was the weakest since the data began in 1974. Gilts rose, pushing the yield on the 10-year bond to near the lowest level since April.

``This is more bad news for sterling,'' said Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. ``It underlines the picture we have that the U.K. economy is heading for a recession.'' The pound may drop to 81 pence per euro by year-end, he forecast.

The U.K. currency fell as much as 0.4 percent to 80.69 pence per euro, the weakest level since April 16. It dropped 2.3 percent in August, the steepest monthly decline since March. The pound fell to $1.8190, posting its biggest one-month drop since sinking 12 percent in October 1992.

Gilts rose for a second month, with the 10-year note yield falling 1 basis point to 4.48 percent, down from 4.81 percent July 31. The yield on the two-year gilt, which is more sensitive to interest-rate expectations, fell 2 basis points to 4.51 percent, taking its decline in the past month to 38 basis points. Yields move inversely to bond prices.

Higher Rates

The confidence data, together with a report showing luxury- home values registered their first annual fall in five years this month, reinforce speculation economic growth may slow enough for the Bank of England to cut its 5 percent benchmark interest rate.

The average value of houses and apartments in London's nine most-expensive neighborhoods dropped 1.6 percent from August 2007, broker Knight Frank LLP said yesterday in a statement. Values fell 1.3 percent from July, a fourth monthly decline.

A report on Aug. 28 showed U.K. house prices had their biggest annual drop in almost two decades.

``All the data points to a slowdown greater than previously anticipated,'' said Grant Lewis, the London-based head of fixed- income research at Daiwa Securities SMBC Europe Ltd. ``This is providing a lift to gilts.''

Investors have been paring bets on higher rates, with the implied yield on the March short-sterling futures contract dropping 32 basis points in the past month to 5.19 percent. That's helped gilts outperform Treasuries and European bonds in the past two months.

Gilts have returned 3.9 percent since June 27, compared with 2.7 percent on European bonds and 1.9 percent on Treasuries, according to Merrill Lynch & Co.'s EMU Direct Government, U.K. Gilts and U.S. Treasury Master indexes.

Ten-year gilts yielded 66 basis points more than Treasuries of a similar maturity yesterday, compared with 117 basis points on Aug. 2, which was the most this year. The U.K. notes yielded 30 basis points more than similar-maturity German bunds. That gap has narrowed from 69 basis points on Feb. 25.

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