Pound Jumps to 9-Month High Against Euro as ECB Lowers Key Rate

The pound climbed to the strongest versus the euro in more than nine months after the European Central Bank unexpectedly lowered its benchmark interest rate, bolstering demand for alternatives to Europe’s shared currency.

Sterling appreciated for a third day versus the Swiss franc after the Bank of England kept its key policy rate at a record low and maintained its bond-buying stimulus target. Britain’s currency weakened versus the dollar after data showed the economy in the U.S. expanded in the third quarter. The yield difference between German and U.K. two-year notes widened to the most since May as ECB President Mario Draghi said borrowing costs will remain low for a “prolonged period.”

“The BOE policy stance looks increasingly out of kilter with the euro area,” said Paul Robson, a London-based foreign-exchange strategist at Royal Bank of Scotland Group Plc. “You’ve got one central bank that’s easing and the other that’s neutral, so that keeps the pound strong versus the euro. Sterling should do well against most European currencies.”

The pound rose 0.8 percent to 83.33 pence per euro at 4:37 p.m. London time after appreciating to 83.01 pence, the strongest level since Jan. 17. Sterling climbed 0.6 percent to 1.4750 Swiss francs. Britain’s currency fell 0.1 percent to $1.6067.

The Frankfurt-based ECB cut its main refinancing rate to 0.25 percent, as forecast by three of 70 economists in a Bloomberg survey. The remaining 67 analysts predicted the ECB would keep borrowing costs at 0.5 percent.

Stimulus Target

The Bank of England’s nine-member Monetary Policy Committee, led by Governor Mark Carney, left its asset-purchase target at 375 billion pounds, as predicted by all 46 analysts in a Bloomberg News survey. Officials also kept the benchmark interest rate at a record-low 0.5 percent, as forecast by a separate survey. The London-based central bank has said it will keep the key rate at a record low until unemployment, currently at 7.7 percent, falls below 7 percent.

Sterling has rallied 4.8 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as improving economic data prompted investors to increase bets the central bank would raise borrowing costs earlier than it predicted. The euro climbed 3.2 percent and the dollar rose 0.6 percent.

The yield difference between U.K. two-year gilts and similar-maturity German debt widened one basis point, or 0.01 percentage point, to 31 basis points.

Output Expands

U.K. services output expanded at the fastest pace in 16 years in October, while industrial production increased more in September than economists forecast, data this week showed.

“The recovery that you’re seeing in the U.K. is very strong,” Jens Nordvig, managing director of currency research at Nomura Holdings Inc., Japan’s biggest brokerage said in an interview on Bloomberg Television’s “Countdown” with Jonathan Ferro and Anna Edwards. “We really like long pound trades,” he said referring to bets that the currency will appreciate.

“We haven’t expressed them against the euro,” Nordvig said. “We’ve expressed it against other European currencies. Swiss and Swedish are the ones we have right now.”

The benchmark 10-year gilt yield fell four basis points to 2.67 percent. The 2.25 percent bond due in September 2023 rose 0.345, or 3.45 pounds per 1,000-pound face amount, to 96.355.

U.K. gilts lost 2.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.3 percent and U.S. Treasuries declined 2.2 percent.

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