The pound strengthened against the dollar, snapping a two-day decline, as optimism that euro-area leaders are acting to ease the region’s debt crisis spurred demand for higher-yielding assets.
Sterling also rose versus the yen and gilts fell as an index of U.K. services unexpectedly gained in November. Italian Prime Minister Mario Monti proposed 30 billion euros ($40 billion) of new austerity measures yesterday, while German Chancellor Angela Merkel and French President Nicolas Sarkozy meet today ahead of a Dec. 9 European Union summit. The European Central Bank will cut interest rates this week, according to the median forecast in a survey of economists.
“Markets in general are cautiously optimistic going into the EU summit and ECB meeting,” said Lee Hardman, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Those expectations are weighing on the safe-haven currencies like the dollar and the yen today and that’s helping to lift cable,” he said referring to the pound against the dollar.
The pound was 0.6 percent stronger at $1.5687 at 4:32 p.m. London time. It appreciated 0.4 percent to 122.05 yen and advanced 0.1 percent to 85.76 pence per euro.
The FTSE 100 Index of stocks rose for the sixth day in the past seven, advancing 0.4 percent. The Stoxx Europe 600 Index climbed 1 percent.
Sterling has appreciated 1.6 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track a basket of 10 developed-nation currencies. The pound’s advance has been surpassed by the dollar, the yen and the Canadian and Australian dollars.
A gauge of services activity based on a survey of purchasing managers rose to 52.1 from 51.3 in October, according to Markit Economics and the Chartered Institute of Purchasing and Supply. The median of 24 estimates in a Bloomberg News survey called for a drop to 50.5.
A separate report from Markit last week showed that manufacturing shrank for a second month in November, while growth in construction slowed. Markit said the services and manufacturing reports indicate the economy will stagnate in the current quarter.
The Engineering Employers Federation cut its U.K. growth forecasts and said manufacturers expect the industry to stall in the first quarter of 2012.
The EEF sees gross domestic product rising 1 percent in 2012 instead of the 2 percent forecast in September, with factory output growing 0.9 percent rather than 2.2 percent, Chief Economist Lee Hopley told reporters at a briefing in London on Dec. 2. A manufacturing survey published today showed companies predict flat output and a “modest contraction” in orders in the first quarter, Hopley said.
BOE Asset Purchases
Bank of England policy makers meeting on Dec. 8 will hold off expanding economic stimulus, according to all 39 economists surveyed by Bloomberg. The Monetary Policy Committee raised its asset-purchase target to 275 billion pounds in October from 200 billion pounds.
“Minutes of the last meeting made it clear that the pace of asset purchases was unlikely to be increased imminently,” wrote Adam Cole, London-based global head of foreign-exchange strategy at RBC Europe Ltd., in an e-mailed note today. “We expect the MPC to do another 50 billion pounds of purchases, but only to make that decision at the February meeting.”
The 10-year gilt yield rose six basis points to 2.35 percent. The yield on two-year notes climbed two basis points to 0.40 percent, up from its record low of 0.36 percent reached on Dec. 1.
Gilts have returned 14 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds made 7.4 percent, with U.S. Treasuries gaining 9.2 percent.