Pound Slides Against Dollar, Euro Amid Swelling Budget Deficit

By Lukanyo Mnyanda

July 21 (Bloomberg) -- The pound fell against the dollar as a report showed the U.K.’s budget deficit climbed in June to the most for that month since records began in 1993, fueling concern the government may struggle to find buyers for its assets.

The decline pushed the U.K. currency down from near the highest level this month against the dollar. The budget shortfall climbed to 13 billion pounds ($21.3 billion), compared with 7.5 billion pounds a year earlier, the Office for National Statistics said in London today. Britain’s Treasury sold 4 billion pounds of 2016 gilts today.

“The question mark over public finances remains a short- term negative for sterling,” said Jeremy Stretch, a senior strategist at Rabobank International in London. “It’s hardly likely to boost sentiment with risk appetite” waning, he said.

The pound slid to $1.6431 as of 10:57 a.m. in London, from $1.6547 yesterday, when it reached the highest level since June 30. Britain’s currency depreciated to 86.57 pence per euro, from 86 pence yesterday.

Sterling may receive so-called support at $1.6395, Stretch said. Support is an area where buy orders for the currency may be clustered. The median forecast of 33 analysts and strategists compiled by Bloomberg is for the pound to weaken to $1.60 by year-end.

U.K. government bonds dropped, pushing the yield on the two-year gilt 4 basis points higher to 1.26 percent. The 4.25 percent security due March 2011 declined 0.08, or 80 pence per 1,000-pound face amount, to 104.80. The 10-year yield increased 2 basis points to 3.85 percent.

Budget Deficit

The budget shortfall increased as tax income fell 5.7 percent and spending increased 2.8 percent, the Office for National Statistics said. The median of 13 forecasts in a Bloomberg News survey was for a deficit of 15.5 billion pounds.

Investors bid for 1.7 times the gilts on offer today, according to the Debt Management Office in London. That compared with 1.6 times at the previous sale in October. The securities were priced to yield an average 3.37 percent. Germany’s 4 percent note maturing July 2016 yielded 3.03 percent.

Gilts also dropped as the Nottingham Evening Post cited Bank of England Deputy Governor Charles Bean as saying the central bank may lift its benchmark interest rate in a first move as it exits its asset-purchasing program.

“It is quite likely we will in the first instance raise bank rate,” the newspaper quoted Bean as saying in an interview.

Investors should sell U.K. two-year gilts as accelerating inflation prompts the central bank to lift interest rates next year, according to JPMorgan Chase & Co.

“Rising inflation should force the MPC to hike rates early next year,” a team including Jan Loeys, global head of market strategy in London, wrote in a report received yesterday. “Accordingly, go short the short end in the U.K.”

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