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U.K. Pound Posts Weekly Gain Against Euro on Signs of Recovery

June 4 (Bloomberg) -- The pound strengthened against the euro, posting a second weekly gain, after a report showed U.K. house prices rose, adding to evidence an economic recovery is gaining pace.

Sterling also rose against the dollar this week, the first advance in more than a month. The average cost of a home rose 6.9 percent in the three months through May from a year earlier, up from 6.6 percent in April, Lloyds Banking Group Plc’s Halifax said today. Gilts rose after a report showed employers in the U.S. hired fewer workers in May than economists forecast, boosting demand for the perceived safety of fixed income as stocks declined.

“People are becoming a little more positive on the U.K.,” said Niels Christensen, a foreign-exchange strategist at Nordea Bank AB in Copenhagen. “We’ve had some good data and that has left sterling with a positive sentiment.”

The pound rose 0.7 percent 82.64 pence per euro as of 4:20 p.m. in London, for a 2.9 percent gain this week. It lost 0.5 percent to $1.4542, leaving it 0.6 percent stronger in the past five days, its first weekly gain since April 23.

Government bonds rose, with the 10-year gilt yield falling seven basis points to 3.5 percent. The yield on the two-year note fell five basis points to 0.84 percent.

Britain’s benchmark stock index fell 1.9 percent after climbing 1 percent earlier. The Stoxx Europe 600 Index lost 1.9 percent and the Standard & Poor’s 500 Index lost 2 percent.

House Prices

The increase in U.K. house prices was less than the 7.4 percent predicted by economists in a Bloomberg survey. Prices declined from a month earlier. Nationwide Building Society said yesterday the average cost of a home increased in May to the highest level since July 2008.

Britain’s currency has climbed 7.2 percent against the euro this year as reports showed the U.K.’s recovery from the worst financial crisis since World War II is gaining momentum.

U.S. Payrolls rose by 431,000 last month, including a 411,000 jump in government hiring of temporary workers for the 2010 census, Labor Department figures in Washington showed today. Economists projected a 536,000 gain, according to the median forecast in a Bloomberg News survey. Private payrolls rose a less-than-forecast 41,000. The jobless rate fell to 9.7 percent.

The pound’s gains may be limited and the currency will probably end the year at 84 pence per euro, Christensen said.

Rate Decision

The Bank of England, which cut interest rates to a record low of 0.5 percent and bought 200 billion pounds of gilts to further depress borrowing costs, is scheduled to announce its next policy decision on June 10. The main rate will stay unchanged, according to 45 economists polled by Bloomberg.

Central bank Deputy Governor Charles Bean said the level of spare capacity created by the recession will counter inflation pressures in the U.K.

“While the exact margin of spare capacity in the economy must be open to debate, at this early stage of the recovery it is more likely than not that this will bear down on inflation for some time,” Bean wrote in an article in The Daily Telegraph newspaper today.

Gilts returned 4.3 percent this year, compared with a 6.4 percent increase for German bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net

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