Pound Rises Versus Euro After BOE Maintains Policy; Gilts Rally

The pound strengthened for the first time in eight days versus the euro after the Bank of England left monetary policy unchanged and as a gauge of manufacturing rose more in July than economists forecast.

Ten-year gilts rose as the central bank’s nine-member Monetary Policy Committee led by Governor Mark Carney refrained from expanding its bond-purchase program and kept its benchmark interest rate at a record low. The Bank of England releases its quarterly Inflation Report next week, which is scheduled to include deliberations on providing guidance on future borrowing costs. The purchasing managers’ index of factory output rose to the highest since March 2011.

“Sterling has rallied, with flows coming out of the euro,” said Peter Frank, global head of currency strategy at Banco Bilbao Vizcaya Argentaria SA (BBVA) in London. “The rise in manufacturing PMI doesn’t really make a big difference to the Bank of England. Carney wants to iron out the deficiencies in the U.K. economy and that’s going to come through in the Inflation Report.”

The pound appreciated 0.7 percent to 86.92 pence per euro at 1:07 p.m. London time after depreciating to 87.70, the weakest since March 12. The U.K. currency added 0.1 percent to $1.5228 after dropping as much as 0.5 percent.

The U.K. currency stayed stronger after the European Central Bank (EURR002W) kept its main refinancing rate at a record-low 0.5 percent.

Sterling reversed earlier declines against the dollar after the MPC kept its stimulus program of asset purchases, known as quantitative easing, at 375 billion pounds and held its benchmark interest rate at 0.5 percent, as predicted in separate Bloomberg surveys of economists.

Forward Guidance

Carney joined the Bank of England from the Bank of Canada, where he introduced forward guidance in 2009, and now must fulfill a directive from Chancellor of the Exchequer George Osborne to assess introducing the strategy in the U.K.

After today’s decision was announced, the Bank of England said it would “respond to the Chancellor’s request for its assessment of the use of thresholds and forward guidance” in next week’s Inflation Report.

The pound has weakened 2.4 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro has appreciated 5.4 percent and the dollar has gained 5 percent.

An index of U.K. manufacturing activity rose to 54.6 from a revised 52.9 in June, Markit Economics and the Chartered Institute of Purchasing and Supply said. Economists forecast 52.8, according to a Bloomberg News survey. Readings above 50 signal expansion.

Data Positive

“This data is clearly positive but the U.K. is coming from a pretty weak position so it needs to be viewed in that context,” said Christian Lawrence, a foreign-exchange strategist at Rabobank International in London, speaking before the central bank’s announcement.

The 10-year gilt yield fell six basis points, or 0.06 percentage point, today to 2.30 percent after dropping to 2.28 percent, the lowest since July 23. The 1.75 percent bond due September 2022 rose 0.44, or 4.40 pounds per 1,000-pound face amount, to 95.49.

Gilts lost 2.8 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bunds declined 1.3 percent and U.S. Treasuries slid 2.6 percent.

To contact the reporters on this story: Eshe Nelson in London at enelson32@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

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

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