Pound Climbs From Record Low Against Euro Before Rate Decision

By Lukanyo Mnyanda

Sept. 4 (Bloomberg) -- The U.K. pound rebounded from a record low against the euro and climbed versus the dollar before a Bank of England meeting at which policy makers will probably keep interest rates unchanged.

The pound still traded near the lowest level in 2 1/2 years against the U.S. currency after HBOS Plc said British house prices fell a more-than-expected 10.9 percent in August, the fifth monthly drop. Prices were forecast to decline 10.7 percent, according to the median forecast of 13 economists surveyed by Bloomberg. The European Central Bank is also expected to leave its main rate on hold today.

``We have a few event risks coming up and if you've made money shorting the pound, it's probably a good idea to make sure your profit isn't eaten away,'' said Divyang Shah, chief strategist in London at CBA Europe Ltd., a unit of Commonwealth Bank of Australia. ``The ECB has been known to create a lot of volatility.'' A short position is a bet that a currency or security will drop.

The pound traded at 81.40 pence per euro as of 9:58 a.m. in London, after earlier dropping to a record 81.88 pence, from 81.60 yesterday. The U.K. currency snapped a seven-day slide against the dollar, rising to $1.7843, from $1.7768 yesterday. The pound will probably resume its decline and trade as low as 83.5 pence per euro by the end of the year, Shah said.

Gilts Decline

U.K. government bonds fell, with the yield on the 10-year gilt rising 2 basis points to 4.52 percent. The price of the 5 percent security due March 2018 dropped 0.17, or 1.7 pounds per 1,000-pound ($1,784) face amount, to 103.70. The yield on the two- year gilt, which is more sensitive to the outlook for interest rates, was little changed at 4.42 percent. Bond yields move inversely to prices.

The average cost of a home fell 12.7 percent to 174,178 pounds ($311,000) from the same month a year earlier, HBOS, Britain's largest mortgage lender, said in a statement today. That's the biggest drop since the series started in 1983. On the month, prices declined 1.8 percent.

The Bank of England will keep its main rate at 5 percent, according to all 61 economists surveyed by Bloomberg. The bank is scheduled to announce its decision at noon in London.

Traders have increased bets the Bank of England will cut rates. The implied yield on the March short-sterling futures contract dropped 14 basis points since the end of August to 5.05 percent today, unchanged from yesterday.

The pound fell yesterday after Nationwide Building Society said its shoppers index showed confidence among consumers stayed at the weakest level in at least four years in August. The U.K. services industry shrank, an industry group said, adding to evidence the second-largest economy in Europe is heading toward a recession.

The pound's depreciation accelerated and bonds rose after Alistair Darling told the Guardian newspaper Aug. 30 the U.K. faces its biggest economic slowdown in 60 years. He said later he was referring to the global economy.

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