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Pound Rises Versus Euro Even as Construction Contracts

The pound appreciated from the weakest level in 15 months against the euro as political turmoil pressured Spanish and Italian government bonds and boosted the relative appeal of Britain’s currency.

Sterling rose versus most of its 16 major counterparts after sliding the most in more than two years against the 17-nation euro on Feb. 1. Ten-year Spanish yields climbed to the most since mid-December as Prime Minister Mariano Rajoy faced opposition calls to resign over allegations he’d received illegal payments. Italy’s debt slid as Silvio Berlusconi narrowed the front-runner’s lead before elections this month. Ten-year gilt yields rose to a nine-month high.

“The pound is stabilizing after heavy selling last week,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “A lot of the bad news is already in the price but the weakening trend remains in place.”

The pound strengthened 1.1 percent to 85.98 pence per euro at 4:49 p.m. London time after depreciating to 87.17 pence on Feb. 1, the weakest since Oct. 31, 2011. Sterling advanced 0.3 percent to $1.5746 after declining 0.7 percent last week.

The pound has weakened 3.8 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro strengthened 2.6 percent and the dollar dropped 0.4 percent.

Euro Concern

Spain’s 10-year yields advanced to as much as 5.44 percent, while the rate on similar-maturity Italian bonds reached 4.49 percent. A report in El Pais newspaper alleged Rajoy accepted illegal payments over a period of 11 years.

The pound strengthened to 77.55 pence per euro in July last year as Europe’s turmoil intensified and investors sought alternatives to the region’s currency.

Sterling rose even after a report today showed construction-industry output contracted last month.

Markit Economics and the Chartered Institute of Purchasing and Supply’s U.K. construction index was at 48.7 last month, unchanged from December. Economists forecast the index would rise to 49.2. A reading below 50 indicates contraction.

Economists said industry reports tomorrow will show U.K. services contracted this month, while those in Germany expanded.

“We’ve had a big fall in sterling, so you’d expect it to take a break and slow down a little bit,” said Gavin Friend, a foreign-exchange strategist at National Australia Bank Ltd. in London. “Most of the move has happened now but we still think it could go a bit lower because the U.K. numbers just cannot compete with the German numbers.”

Bank of England policy makers will keep the benchmark rate unchanged at 0.50 percent on Feb. 7, according to all 54 analysts in a Bloomberg survey.

The 10-year rate was little changed at 2.09 percent after reaching 2.17 percent, the most since April 20. Two-year gilt yields slid three basis points to 0.32 percent.

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