Pound Gains Most in 4 Months Versus Euro on LTRO, Outlook

Feb. 29 (Bloomberg) -- The pound rose the most in four months against the euro after the European Central Bank loaned a record amount of cash to euro-area banks, fueling speculation financial-sector earnings will boost the U.K. economy.

Ten-year gilts fell for the first time in seven days. Sterling gained for a second day versus the dollar after reports showed U.K. consumer confidence held at the highest level since June and mortgage approvals increased, adding to speculation Britain will avoid a recession.

“The pound is the FX world’s way of expressing any bullish financial institutional factors at play,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “If financial institutions gain more access to liquidity it should lead to a higher pound.”

Sterling climbed as much as 1.1 percent, the steepest intraday gain since Oct. 31, before trading 1 percent higher at 83.76 pence per euro at 4:46 p.m. in London. The pound gained 0.3 percent to $1.5947 after rising to $1.5993, the highest since Nov. 14.

Gilts fell after the ECB said it will lend banks 529.5 billion euros ($712 billion) for three years, exceeding the 489 billion euros handed out to 523 institutions in the first three-year operation in December. Economists surveyed by Bloomberg predicted an allotment of 470 billion euros in today’s tender.

Improving Sentiment

The take up of ECB loans was “pretty much in line with our expectations so I think the mild risk-on sentiment that we were seeing will sustain,” said Vatsala Datta, an interest-rate strategist at Lloyds Bank Corporate Markets in London. “Gilts should remain under slight pressure as a consequence.”

The 10-year gilt yield was five basis points higher at 2.15 percent. The 4 percent security due March 2022 fell 0.460, or 4.60 pounds per 1,000-pound face amount, to 116.615. Two-year yields were little changed at 0.41 percent.

An index of U.K. consumer sentiment remained at minus 29 from January, the strongest reading since June, London-based GfK NOP Ltd. said in an e-mailed report today. A measure of Britons’ outlook for the economy rose 4 points to minus 29.

Mortgage approvals climbed to a two-year high in January, the Bank of England said. Lenders granted 58,728 loans to buy homes, compared with 55,019 the previous month. It was the fourth successive monthly increase.

Extend Gains

The pound is poised to extend gains versus the dollar after breaking through its 200-day moving average at $1.5902, said Axel Rudolph, a senior technical analyst at Commerzbank AG in London. Sterling may advance to $1.60 by the end of this week and reach as high as $1.6129, London-based Rudolph said.

Sterling has risen 0.9 percent in the past week according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies, trimming its declined for the past year to 3.2 percent.

U.K. government bonds also fell after Bank of England Deputy Governor Paul Tucker said policy makers must be ready to withdraw stimulus when the U.K. economy strengthens.

Gilts have handed investors a 0.7 percent loss this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

-- Editors: Mark McCord, Nicholas Reynolds

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net