Feb. 14 (Bloomberg) -- The pound rose for the first time in four days against the euro after a report showed the euro-area recession deepened last quarter, spurring demand for alternatives to European assets.
Sterling strengthened from near the weakest since October 2011 against the 17-nation currency as gross domestic product in Germany and France also declined. U.K. five-year government bonds rose after the Treasury sold 4 billion pounds ($6.2 billion) of the securities as yields at the highest in five weeks lured investors. The difference in yields between five-and 10-year gilts widened to the most since December 2011.
“This morning the market was reminded that there are still a lot of issues in the euro-region and we saw sterling up against the euro,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The euro-region GDP numbers weren’t very good at all and the market has sold the euro on the back of them.”
The pound gained 0.8 percent to 85.89 pence per euro at 4:21 p.m. London time after tumbling 2.3 percent during the previous three days. The U.K. currency fell 0.1 percent to $1.5521 after dropping to $1.5483, the weakest since July 26.
Gross domestic product in the euro area fell 0.6 percent from the previous three months, the European Union’s statistics office said. That’s the worst performance since the first quarter of 2009 and exceeded the 0.4 percent median forecast of economists surveyed by Bloomberg News.
Sterling has still depreciated 4.6 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.5 percent and the euro has risen 1.6 percent.
The pound may decline to 88.90 pence per euro by Dec. 31 as confidence in Europe improves and U.K. fundamentals remain weak, Rabobank’s Foley said.
The U.K. currency slumped at least 0.8 percent against all 16 of its major counterparts yesterday as the Bank of England released its quarterly Inflation Report and Governor Mervyn King said Britain faced a muted recovery.
Investors should sell the pound against the dollar as the U.K. currency may weaken to its January 2012 low of $1.5235, according to Morgan Stanley.
“The pound has come under further pressure following the BOE’s inflation report,” strategists including Hans Redeker in London, wrote today in a research note. “Further easing measures are possible,” they wrote.
Five-year gilts rallied after today’s auction as the euro-area data fueled demand for safer investments.
“The euro-region GDP results were bad which has helped fixed-income assets,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “The auction was pretty solid. Overall it’s a good result.”
The Treasury sold the five-year securities at an average yield of 1.277 percent, compared with 0.958 percent at the previous auction on Jan. 3. Investors bid for 1.83 times the number of securities allotted, versus an average of 1.63 times at the previous five auctions.
The five-year yield fell four basis points, or 0.04 percentage point, to 0.96 percent after rising to 1.04 percent, the highest level since Jan. 7. The 1 percent gilt maturing in September 2017 gained 0.17, or 1.70 pounds per 1,000-pound face amount, to 100.18.
The extra yield investors demand to hold 10-year securities instead of five-year gilts widened two basis points to 123 basis points after reaching 124, the most since Dec. 7, 2011.
U.K. government bonds handed investors a loss of 3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 1.8 percent and Treasuries fell 1.1 percent.
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