July 18 (Bloomberg) -- The pound strengthened versus the euro after a report showing U.K. retail sales increased for a second month in June added to evidence the economic recovery is gaining traction.
Sterling erased a decline against the dollar. The British currency rallied versus all but two of its 16 major peers yesterday after minutes of the Bank of England’s latest meeting showed policy makers, led by new Governor Mark Carney, voted unanimously against expanding a stimulus program that tends to debase the currency. Two-year gilts rose for a third day, pushing the yield to the lowest level since May.
“We’re optimistic on sterling, not so much against the dollar, but we think it’s going to strengthen against the euro,” said Nick Parsons, head of research for U.K. and Europe at National Australia Bank Ltd. in London. “If you ask yourself would you rather own pound or euro at these levels, given what we know about the relative economic fundamentals, the answer is clearly buy sterling.”
The pound appreciated 0.2 percent to 86.08 pence per euro at 4:26 p.m. London time after weakening to 86.47 pence earlier. It strengthened 0.6 percent yesterday, the biggest one-day gain since June 20. The U.K. currency was little changed at $1.5206 after falling as much as 0.4 percent.
Retail sales including fuel rose 0.2 percent from May, when they surged 2.1 percent, the Office for National Statistics said today. That’s the first consecutive increase since July 2012. The median forecast of 20 economists in a Bloomberg News survey was for a 0.3 percent gain. From a year earlier, sales increased 2.2 percent.
The two-year gilt yield dropped three basis points, or 0.03 percentage point, to 0.28 percent after reaching 0.27 percent, the lowest since May 9. The 2.75 percent security due in January 2015 rose 0.03, or 30 pence per 1,000-pound face amount, to 103.71. The rate on the 10-year gilt fell four basis points to 2.25 percent.
While the U.K. economy showed signs of recovery, demand for gilts will be underpinned by growth that is likely to remain weak, said Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London.
“There is still this uncertainty as to why the U.K. economy’s suddenly picked up in the second quarter when everyone else’s seems to have slowed down,” Marshall said. “That puts a question mark against the sustainability of a recovery. That’s why gilts rallied. People have realized quite rightly that the base rate isn’t going to move for the next two, three or five years even.”
Gilts dropped 2.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds declined 0.7 percent and Treasuries fell 2.3 percent, the indexes show.
The pound has weakened 0.4 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 2.9 percent and the euro gained 0.2 percent.
Gains by the pound versus the dollar may provide investors with a selling opportunity as the Bank of England’s policy will continue to be accommodative, Morgan Stanley strategists including Hans Redeker wrote in an e-mailed note to clients. The bank suggests investors sell the pound against the U.S. currency should the pair reach the 100-day moving average at $1.5260.
In Carney’s first policy meeting, fellow policy makers Paul Fisher and David Miles dropped their call for an expansion of the asset-purchase program in favor of a strategy involving guidance on future interest rates, the minutes showed.
“The Bank of England minutes did not signal a change in tone, but rather a change in the choice of policy tools used to ease monetary conditions,” the Morgan Stanley strategists wrote. “Forward interest rate guidance is being explored and, if adopted, could weigh on the pound.”
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