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Pound Advances to Highest This Month Against Euro; Gilts Decline

The pound climbed to the strongest this month against the euro amid speculation European Union leaders meeting this week will fail to agree on measures to stop the region’s debt crisis from spreading.

Sterling advanced for a second day versus the single currency as Italian and Spanish borrowing costs surged at debt auctions, boosting demand for the pound as a haven. Gilts fell after a government report showed Britain had a larger budget deficit in May than economists forecast. The U.K. sold 1.25 billion pounds ($1.96 billion) of inflation-linked debt.

“We have the EU summit, which I think is most likely to be taken by the market in a disappointing fashion,” said Steven Barrow, head of Group-of-10 research at Standard Bank Plc in London. “Euro-sterling is going to go down,” he said, meaning the pound will strengthen versus the 17-nation single currency.

Sterling appreciated 0.5 percent to 79.92 pence per euro at 4:15 p.m. London time after reaching 79.85 pence, the strongest since May 30. The pound gained 0.1 percent to $1.5594. It fell to $1.5539 yesterday, the weakest since June 15.

EU leaders gather in Brussels for two days of talks starting June 28, the 19th meeting since the debt crisis broke out in early 2010. Spain sold three-month bills at a yield of 2.36 percent today, up from 0.85 percent at the previous auction. Italy sold zero-coupon debt due in 2014 at a yield of 4.71 percent, compared with 4.04 percent on May 28.

Second Best

The pound has appreciated 1.9 percent this year, according to Bloomberg Correlation-Weighted Indexes, as investors sought safety from Europe’s debt turmoil. Only New Zealand’s dollar rose more among the 10 developed-market currencies. The euro dropped 2.7 percent.

Sterling’s advance against the dollar may be capped by resistance at the 200-day moving average, currently at $1.5749, according to data compiled by Bloomberg. Resistance refers to an area where sell orders may be clustered.

The yield on the 10-year gilt rose the most in a week after the Office for National Statistics said the budget shortfall excluding government support for banks was 17.9 billion pounds in May. Economists forecast a deficit of 14.8 billion pounds, according to a Bloomberg survey.

The 10-year gilt yield rose one basis point, or 0.01 percentage point, to 1.68 percent, after climbing as much as six basis points, the most since June 19. The 4 percent bond due in March 2022 fell 0.11, or 1.10 pounds per 1,000-pound face amount, to 120.65.

More Stimulus

Bank of England Governor Mervyn King told lawmakers in London today that his vote for more stimulus, or quantitative easing, this month reflected his concern the global economic outlook is deteriorating.

“What’s concerned me in the last several months, and why I voted for easing in policy, is the worsening in the position in Asia and other emerging markets,” King said. Another reason is that “my colleagues in the U.S. are more concerned than they were at the beginning of the year about what’s happening in the American economy,” he said.

The Bank of England will increase its asset-purchase plan by 75 billion pounds at its July 5 meeting to 400 billion pounds, Philip Rush, an economist at Nomura Holdings Inc. in London, wrote in an e-mailed note to clients. Nomura had previously predicted the central bank would increase stimulus by 50 billion pounds in August.

“Sterling saw no material impact from the BOE testimonies on the Treasury Select Committee,” strategists led by Marc Chandler at Brown Brothers Harriman & Co. in New York, wrote in a note to clients. “Still, the testimony reaffirmed the BOE’s dovish stance. The comments underline expectations that the BOE is more likely to resume QE.”

The Debt Management Office sold the inflation-linked bonds due in March 2029 at a yield of minus 0.11 percent. That compares with minus 0.05 percent at a prior auction on April 19.

U.K. government debt has returned 3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 2.9 percent, and U.S. Treasuries rose 2 percent.

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