Pound Set for Monthly Loss as Confidence Holds Near Record Low

By Lukanyo Mnyanda and Andrew MacAskill

Aug. 29 (Bloomberg) -- The pound fell to the lowest level in more than four months against the euro after a private report showing consumer confidence held near a record low in August strengthened the case for lower interest rates.

The pound is also headed for the biggest monthly drop in almost 16 years versus the dollar after a confidence index based on a survey of 2,001 people rose 3 points from July's minus 39, the weakest since the data began in 1974, GfK NOP said today. Gilts extended gains, pushing the yield on the 10-year gilt to near the lowest level since April, after a report yesterday showed house prices had their biggest annual drop in almost two decades.

``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, and was at 80.63 by 9:10 a.m. in London. It has dropped 2.4 percent in August, set for the steepest monthly loss since March. The pound was at $1.8298, headed for its biggest one-month drop since sinking 12 percent in October 1992.

Gilts headed for a second monthly gain, with the yield on the 10-year note falling 3 basis points to 4.45 percent, from 4.81 percent on July 31. The yield on the two-year gilt, which is more sensitive to interest-rate expectations, also dropped 3 basis points, to 4.47 percent, from 4.8 percent. 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 today in a statement. Values fell 1.3 percent from July, a fourth monthly decline.

Investors have been paring bets on higher rates, with the implied yield on the March short-sterling futures contract dropping 31 basis points in the past month to 5.25 percent today. 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.

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