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Pound Reaches Three-Month High Versus Euro as Portuguese Bond Yield Soars

The pound reached its strongest in more than three months against the euro as speculation that the British economy will be more resilient than the euro region outweighed a weaker-than-forecast U.S. employment report.

Sterling appreciated for the first day in three against the dollar as data showed U.S. payrolls increased 103,000 in December, compared with the median forecast of 150,000 in a Bloomberg News survey. The U.S. unemployment rate dropped, Labor Department figures showed.

“Everyone’s concentrating on the euro’s woes, taking the U.S. data out of the situation,” said Paul Bednarczyk, a strategist in London at 4Cast Ltd., a research company that counts central banks among its subscribers. Bednarczyk said the reaction to the U.S. data may have been muted by the drop in the unemployment rate.

The pound appreciated 1.1 percent to 83.10 pence per euro at 5:07 p.m. in London after reaching 83.07 pence, the strongest since Sept. 13. Sterling gained 0.6 percent to $1.5562.

The British currency lost 0.3 percent against the dollar this week after slipping 3.5 percent against the greenback in 2010. Against the euro, sterling has appreciated 3.1 percent in the past five days, the most since September 2009.

“We don’t have a solution to the European debt crisis so far,” said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. “That’s pretty negative for the euro against sterling. Rising bond spreads signal that the euro crisis is not solved and could pop up again.”

BOE Outlook

Portuguese government bonds led declines by securities from the euro-region’s most indebted nations today amid concern demand at auctions next week may flag. The yield on Portuguese 10-year bonds rose six basis points, after a 27 basis-point increase yesterday.

The U.K. economy will grow 2 percent this year, outpacing the 1.5 percent pace forecast for the euro area, a Bloomberg survey of economist forecasts shows.

The Bank of England meets Jan. 13 and is expected to leave its bond-purchase plan at 200 billion pounds ($309 billion) and hold its benchmark interest rate at a record low of 0.5 percent, according to a Bloomberg survey of economists. Minutes of the central bank’s December meeting showed policy makers were split three ways on the need for economic stimulus as some officials became more concerned that inflation may persist.

“We’ve got this massive, very open type debate about U.K. interest rates which I think will create volatility for the pound, and we’ve already begun to see that this year,” said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. “At the same time we have huge fiscal austerity coming into play, which is going to create nervousness.”

Blanchflower

U.K. Prime Minister David Cameron’s government is currently cutting spending and raising taxes to eradicate a record budget deficit. Value-added tax, a levy on sales that applies to most consumer goods and services, rose to 20 percent from 17.5 percent from Jan. 4 as part of this package.

Higher interest rates would “have a real kick-down for house prices and probably consumption as well,” David Blanchflower, an economics professor at Dartmouth College and a former Bank of England policy maker, said today in a Bloomberg Television interview. The Monetary Policy Committee “has to sit on its hands,” he said. Blanchflower contributes to Bloomberg News as a columnist.

The Bank of England’s credibility is at risk if it doesn’t raise rates this year, Societe Generale SA Chief U.K. Economist Brian Hilliard said. He sees policy makers raising the benchmark interest rate by 0.5 percentage point in August and again in November, he told Bloomberg in an interview today.

U.K. 10-year gilts rose with the yield on the 10-year gilt falling two basis points to 3.50 percent. Two-year yields climbed one basis point to 1.19 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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