The pound climbed the most in two weeks against the euro amid bets its 6.5 percent slide this year has been excessive amid the possibility the government will delay fiscal austerity measures in its budget next week.
Sterling strengthened against all but two of its 16 major counterparts. It snapped a five-day drop versus the dollar after a weekly gauge of its relative strength dropped to the lowest level since November 2008, signaling the currency was poised to rally. The 10-year break-even rate, a gauge of inflation expectations, matched a 4 1/2-year high on speculation the Bank of England will sacrifice its 2 percent inflation target to boost growth. Gilts were little changed.
“There’s some position adjustment, people trying to pick the bottom because we have gone a long way and a lot of bad news is in the price,” said Jane Foley, senior currency strategist at Rabobank International in London. “I would still favor selling the rallies in sterling.”
The pound appreciated 0.7 percent to 86.81 pence per euro at 4:49 p.m. London time after gaining 0.9 percent, the steepest intraday advance since Feb. 25. Sterling rose 0.1 percent to $1.4919 after strengthening as much as 0.5 percent. It fell to $1.4832 yesterday, the weakest level since June 23, 2010.
Foley recommended selling the U.K. currency at levels around $1.50, betting that it will weaken further before Chancellor of the Exchequer George Osborne’s budget.
“Chances for positive data surprises could increase if Chancellor Osborne uses the Budget on March 20 to announce the delay of some fiscal austerity measures,” Valentin Marinov, head of European Group of 10 currency strategy at Citigroup Inc. in London, wrote today in a note to clients. “We see any sterling upside from here as temporary and would use it as an opportunity to add our bearish medium-term view.”
The pound has dropped 6.1 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 1.2 percent and the dollar gained 3.4 percent.
Sterling’s 14-week relative strength index against the dollar fell to 24.6, the lowest since November 2008 and below the 30 level that some traders see as a signal an asset has fallen too rapidly and may be due to reverse course.
The U.K. economy shrank 0.1 percent in the three months through February, the National Institute of Economic and Social Research said yesterday, raising the specter of a triple-dip recession and adding weight to calls for additional Bank of England stimulus.
“The pound is going to be structurally weaker and the reason is the situation of the U.K. economy, which is lacking in growth and has a monetary policy which is not helping the pound,” said Giordano Lombardo, who helps oversee the equivalent of $221 billion as chief investment officer at Pioneer Investments in Milan, Italy. He spoke in an interview on Bloomberg Television’s “On the Move” with Francine Lacqua.
Investors are too pessimistic on the U.K. currency, according to Geoffrey Yu, a senior currency strategist at UBS AG. He sees $1.41 and 95 pence per euro as the lows for sterling, he said at the Bloomberg FX Debate in London today.
The 10-year gilt yielded 1.96 percent after dropping nearly 10 basis points, or 0.1 percentage point, during the past two days. The price of the 1.75 percent bond due in September 2022 was at 98.16.
The 10-year break-even rate, which measures the yield difference between gilts and index-linked securities, was little changed at 3.35 percent, after rising to 3.36 percent, matching yesterday’s high, which was the most since September 2008.
“We have seen some weaker data over the past couple of weeks,” said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “That’s been driving the yield levels lower again. The BOE still have a bias towards further easing rather than tightening. It’s reasonable for investors to want to look for inflation protection.”
The Debt Management Office sold 1.5 billion pounds of gilts due in July 2052 at an average yield of 3.434 percent. It last auctioned the securities on Nov. 15 at 3.219 percent.
U.K. government bonds lost 1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 0.7 percent and Treasuries fell 0.9 percent.