Pound Strengthens Versus Euro, Dollar Amid BOE Rate Speculation

The pound reached a 21-month high versus the euro this week as speculation the Bank of England will tighten policy in contrast to the European Central Bank boosted the relative allure of the U.K. currency.

Sterling climbed to the highest since 2008 against the dollar, posting the longest run of weekly advances in more than 1 1/2 years, as reports showed manufacturing and construction growth accelerated in June. The data adds to signs of a strengthening economy and bolsters the case for the BOE to consider raising interest rates. The ECB pledged Thursday to keep borrowing costs low. U.K. government bonds declined, with two-year (GUKG2) gilt yields touching a three-year high.

“What’s most significant for euro-sterling is the policy divergence between the Bank of England and the ECB,” said Steve Barrow, head of Group-of-10 research at Standard Bank Plc in London. “I’m surprised by the robustness of the U.K. data. I’m still bullish on sterling generally.”

The pound rose 1.1 percent this week to 79.24 pence per euro at 5 p.m. London time yesterday, having appreciated to 79.19 pence, the strongest level since September 2012. Sterling gained 0.7 percent to $1.7160 after advancing to $1.7180, the highest level since October 2008.

Growing Economy

The manufacturing and construction data, together with expansion in the services sector, indicate the economy grew 0.8 percent in the second quarter, Markit Economics said July 3. That would match the pace seen in the three months through March and push gross domestic product above its pre-crisis peak. Investors are betting the BOE will raise the benchmark rate by February, Sonia derivatives contracts show.

The pound rose 11 percent in the past 12 months, the best performer among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro climbed 2 percent and the dollar declined 3.7 percent.

The Bank of England is forecast by economists to leave the key interest rate at a record-low 0.5 percent when it announces its next policy decision on July 10. The first official estimate for second-quarter GDP will be published on July 25.

Benchmark 10-year (GUKG10) gilt yields rose 12 basis points, or 0.12 percentage point, in the week to 2.76 percent, the biggest advance this year. The 2.25 percent bond maturing September 2023 fell 0.92, or 9.20 pounds per 1,000-pound face amount, to 95.916. Two-year gilt yields, seen as most sensitive to interest-rate expectations, rose to as much as 0.94 percent on July 3, the highest since May 2011.

Gilts returned 3 percent this year through July 3, according to Bloomberg World Bond Indexes. German securities earned 4.6 percent and Treasuries gained 2.6 percent.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Mark McCord, Todd White

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