Pound Strengthens Versus Euro as Retail Sales Surge; Gilts Rise

The pound strengthened against the euro this week as a government report showed U.K. retail sales grew at a record pace for a December, adding to optimism the recovery is gaining momentum.

Sterling posted its fourth weekly gain in five weeks versus the common currency as separate data showed inflation slowed, allowing Bank of England Governor Mark Carney to keep interest rates at a record low to help the economy build momentum. The pound has appreciated at least 2 percent versus all its major counterparts in the past six months. U.K. government bonds advanced for a third week.

“Sterling has been supported by the stronger-than-expected retail sales data,” said Manuel Oliveri, a foreign-exchange strategist at Credit Agricole Corporate & Investment Bank in London. “We think the pound has scope to trend higher versus the euro but it’s not a fast mover. The market is already long of sterling,” he said, referring to a bet it will strengthen.

The pound rose 0.5 percent this week to 82.48 pence per euro at 5 p.m. in London yesterday after appreciating to 82.31 pence on Jan. 9, the strongest level since January 2013. The U.K. currency weakened 0.3 percent to $1.6433.

The pound has gained 8.2 percent in the past six months, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 2.9 percent, while the dollar dropped 0.7 percent.

Sales Jump

Retail sales including fuel climbed 2.6 percent from November, the Office for National Statistics said yesterday, the best December since records began in 1996. Economists surveyed by Bloomberg predicted a gain of 0.3 percent. Consumer-price inflation slowed to 2 percent in December from 2.1 percent the previous month, the statistics office said Jan. 14.

Carney said in August policy makers wouldn’t consider raising the key interest rate at least until unemployment dropped to 7 percent. The jobless rate fell to 7.3 percent in the three months through November, from 7.4 percent in the quarter through October, according a Bloomberg survey before the data is released on Jan. 22.

The benchmark 10-year gilt yield dropped four basis points, or 0.04 percentage point, this week to 2.83 percent after falling to 2.80 percent yesterday, the lowest level since Dec. 2. The 2.25 percent bond due in September 2023 rose 0.35, or 3.50 pounds per 1,000-pound face amount, to 95.135.

U.K. gilts handed investors a loss of 2 percent in the 12 months through Jan. 16, according to Bloomberg World Bond Indexes. Treasuries declined 2.4 percent and German securities dropped 0.1 percent.

The U.K. is scheduled to auction 3.25 billion pounds of 10-year gilts on Jan. 23. It last sold similar-maturity debt on Dec. 3 at an average yield of 2.977 percent. The government will also sell inflation-linked bonds maturing in 2068 through banks next week.

To contact the reporter on this story: 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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