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U.K. Pound Advances Against Euro Amid ECB Rate-Cut Speculation

The pound advanced against the euro, recording its biggest weekly gain since October, as speculation the European Central Bank may cut interest rates next year damped demand for alternatives to the common currency.

Gilts rose even after the Bank of England’s Monetary Policy Committee maintained its program of asset-purchases to boost the economy, known as quantitative-easing, at 375 billion pounds ($601 billion) and kept its key interest rate at a record-low 0.5 percent. Chancellor of the Exchequer George Osborne this week revised down the government’s economic growth forecasts and said the budget deficit will take longer to tame than originally planned.

“The euro was doing very well until the early part of this week and it’s now taken on board a greater probability of an ECB cut,” said Simon Smith, chief economist at FxPro Group Ltd. in London. “Sterling’s sensitivity to what the Chancellor said was pretty low.”

The pound appreciated 0.5 percent to 80.72 pence per euro at 5 p.m. London time yesterday, the most since the period ended Oct. 26. Sterling was little changed at $1.6031.

ECB President Mario Draghi, speaking at a press conference in Frankfurt after the ECB held its key rate at 0.75 percent, said there had been “wide discussion” on borrowing costs at the central bank’s meeting. A majority of policy makers were open to cutting the benchmark rate, three officials with knowledge of the Governing Council’s deliberations said yesterday.

Target Missed

Sterling has appreciated 1.1 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 2.5 percent and the dollar fell 2.3 percent.

Osborne told lawmakers on Dec. 5 that his fiscal watchdog, the Office for Budget Responsibility, believes he will miss his target to begin cutting government debt in 2015-16. The economy will shrink 0.1 percent this year instead of the 0.8 percent growth predicted in March, and expand 1.2 percent next year instead of 2 percent, Osborne said. Fitch Ratings said the admission weakened the “credibility” of the U.K.’s fiscal policy.

The benchmark 10-year gilt yield dropped three basis points to 1.74 percent. The 1.75 percent bond due September 2022 rose 0.29, or 2.90 pounds per 1,000-pound face amount, to 100.07.

The yield difference between 10- and 30-year gilts widened the most since February after the government announced pension- plan revisions that may sap demand for longer-dated debt. The spread widened 11.5 basis points to 136 basis points, the biggest weekly increase since the period ending Feb. 10.

U.K. Unemployment

A Dec. 12 report will show the U.K. jobless rate held at 7.8 percent in the three months through October, according to the median estimate of 27 economists in a Bloomberg News Survey. The U.K. Debt Management Office is selling as much as 3.25 billion pounds of gilts due in 2022 on Dec. 11, followed by a further 1.1 billion pounds of inflation-linked bonds maturing in 2024 two days later.

Gilts returned 3.1 percent this year through Dec. 6, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4.3 percent and U.S. Treasuries rose 2.8 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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