U.K. Pound Strengthens Versus Euro Amid Sovereign-Debt Concern

The pound strengthened against the euro on concern the region’s debt crisis will worsen, allowing the U.K. economy to outperform its neighbors.

The British currency appreciated against the dollar for a seventh consecutive day before data tomorrow that is forecast to show inflation will remain above the government’s 3 percent target for a tenth straight month in December, fuelling speculation that the Bank of England may raise its benchmark interest rate in the third quarter. A report today showed U.K. home sellers raised asking prices in January. European finance chiefs meet today to discuss a new strategy to fight the crisis.

“As long as the euro-zone debt crisis is in the focus of the market, it will be the main driver of euro-pound,” said You-Na Park, a currency strategist at Commerzbank AG in Frankfurt. “The inflation story and the chance the Bank of England might hike rates in the middle of this year is also supporting the pound.”

Sterling appreciated 1 percent to 83.53 pence per euro at 2:35 p.m. in London. Against the dollar, the pound strengthened 0.3 percent to $1.5917.

U.K. consumer prices rose an annual 3.4 percent in December, according to a Bloomberg survey of 31 economists, before a report from the Office for National Statistics tomorrow. Retail prices climbed 4.8 percent from a year earlier, the report is forecast to show.

Average asking prices for homes in England and Wales rose 0.3 percent to 223,121 pounds ($354,400) from December, when they dropped 3 percent, Rightmove Plc said today.

BOE Outlook

The Bank of England kept its key rate at a record low last week and left its bond-purchase program unchanged. The central bank’s policy makers were split three ways over whether to focus on risks to growth or rising prices, according to the minutes of the previous meeting in December, as Prime Minister David Cameron’s government pushes through the biggest public-spending cuts since World War II.

“I think the Bank of England will hold on to the wait-and- see approach for as long as they can,” said Paul Bednarczyk, a strategist in London at 4Cast Ltd., a research company that counts central banks among its subscribers. “There is quite a debate over when they will move. Some people are looking for a rate rise in June, some are looking for March.”

Ernst & Young LLP’s Item Club said today the Bank of England must “hold its nerve” and not raise its key interest rate until the recovery shows signs of overcoming the impact of the government’s budget squeeze. The research group, which uses the same forecasting model as the U.K. Treasury, revised its prediction for 2011 growth to 2.3 percent from 2.2 percent.

Short Sterling

The implied yield on short-sterling futures contracts for December 2011, which anticipates where short-term interest rates will be, rose two basis points to 1.6 percent as traders added to bets for higher borrowing costs. The yield was at 1.25 percent at the beginning of the year.

The U.K.’s central bank is forecast to raise its benchmark rate 25 basis points to 0.75 percent in the third quarter of this year, according to the median forecast of economists in a Bloomberg survey.

Futures traders decreased their bets that the pound will decline against the U.S. dollar, figures from the Washington- based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain -- so-called net shorts -- was 5,090 on Jan. 11, compared with net shorts of 14,133 a week earlier.

Citigroup Report

A report from Citigroup today said the euro may slump against the pound as European leaders fail to reassure investors that they can tackle the debt crisis and rising U.K. consumer prices add to bets on higher interest rates.

“Euro-pound seems vulnerable also ahead of the U.K. CPI tomorrow,” Valentin Marinov, a currency strategist at Citigroup in London, wrote in a report today. “Another strong reading could continue to fuel expectations that the Bank of England will respond more decisively to growing evidence that persistent price pressures are fuelling inflation expectations.”

The British economy will expand at a rate of 2 percent this year and 2.1 percent next year, a Bloomberg survey of 17 economists’ predictions shows, outperforming euro-region growth, which is forecast to be 1.5 percent this year and 1.8 percent next year.

U.K. government bonds were little changed, with the 10-year yield at 3.62 percent and the two-year yield at 1.33 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net 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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