Pound Rises a Second Day Against Euro as U.K. Sentiment Improves

The pound strengthened for a second day against the euro after data showed U.K. executives’ confidence for 2013 improved this month, indicating the risk of a triple-dip recession may be receding.

Gilts held their biggest weekly gain in a month as U.S. lawmakers debated ways to prevent automatic spending cuts and tax increases that risk triggering a recession. Yields on British two-, five-, 10- and 30-year bonds fell to the lowest on record this year as the deepening crisis in the euro-region and the Bank of England’s asset-buying program boosted demand. The pound is set for its fourth yearly advance against the euro, the longest since the 17-nation currency’s introduction in 1999.

“I don’t buy into the euro-positive story and ultimately sterling will be better placed against the euro,” said Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon Corp. (BK) in London. “You can’t look at any euro-zone country and conclude that 2013 is going to be a positive year. Sterling is one of the more difficult currencies to try and pin down. Our working presumption is that it’s going to remain trapped somewhere between the euro and the dollar.”

The pound appreciated 0.3 percent to 81.52 pence per euro as of 12:15 p.m. London time, after gaining 0.5 percent on Dec. 28, the biggest increase since Dec. 6. It has gained 2.2 percent against the common currency in 2012. Sterling was little changed at $1.6171, having risen 4.1 percent this year.

Business Sentiment

Lloyds Banking Group Plc said in a report today an index of business sentiment rose to 40 from 35 in November. A gauge measuring the outlook for the economy increased to 20 from 17, which Lloyds said is consistent with “broadly flat underlying growth” at the end of this year.

A rising pound shows the challenges new Bank of England Governor Mark Carney, who takes over from Mervyn King in July, will face as he tries to boost an economy weighed down by recession in the euro region. Investors seeking a haven have pushed the pound higher even as the central bank increased bond purchases to 375 billion pounds, a move that usually debases a currency.

The Bank of England decided to pause its program of so- called quantitative easing in November, saying risks from the euro-area crisis had receded and inflation concerns persist.

The 10-year gilt yield was little changed at 1.82 percent, after dropping six basis points, or 0.06 percentage points, last week, the biggest decline since the period ended Nov. 30. The 1.75 percent bond due in September 2022 traded at 99.41. The rate fell to 1.407 percent on July 23, the lowest since Bloomberg started tracking the data in 1989.

‘Capping Yields’

That yields have remained “near those record lows reflects both that domestic monetary policy has been effective in capping yields and that the euro crisis has been supportive too,” said Sam Hill, a fixed-income strategist at RBC Capital Markets in London. “Heading into 2013 it is expected that low and stable yields will continue to be an important part of the slow recovery. If there is any threat to this status quo it wouldn’t be too surprising to see expectations of more QE grow.”

The gilt market was scheduled to close at 12:15 p.m. in London and will resume trading on Jan. 2.

Gilts returned 2.8 percent this year through Dec. 28, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4.5 percent and Treasuries earned 2.4 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

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