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Pound Advances Against Euro as Draghi Says Ready to Act in June

May 8 (Bloomberg) -- The pound strengthened to an 11-week high against the euro as European Central Bank President Mario Draghi said the Governing Council was ready to increase stimulus next month if needed, damping demand for the common currency.

Sterling rose to within 0.1 percent of $1.70, a level last reached in August 2009, as data today showed Britain’s house prices increased in April. Bank of England and ECB policy makers left interest rates unchanged today. Money market rates show the Britain’s central bank will increase borrowing costs by April. U.K. government bonds were little changed.

“It’s all about Draghi,” said Stuart Bennett, head of Group-of-10 foreign-exchange strategy at Banco Santander SA in London. “The caveat is always ‘if needed’ but it was just enough for the euro bulls to give up this attack and that’s what euro-sterling is driven by.”

The pound gained 0.3 percent to 81.79 pence per euro at 4:44 p.m. London time after reaching 81.69 pence, the strongest since Feb. 17. Sterling was little changed at $1.6949 after rising to $1.6975. It climbed to $1.6996 on May 6, the most since August 2009.

The Bank of England kept its Official Bank Rate at 0.5 percent, as forecast by all 51 economists in a Bloomberg News survey. The ECB held its main refinancing rate at an all-time low 0.25 percent, in line with the prediction of 56 of 58 analysts surveyed by Bloomberg.

‘Next Time’

“The Governing Council is comfortable with acting next time, but before we want to see the staff projections that will come out in the early June,” Draghi said at a press conference in Brussels after the policy decision was announced. “There wasn’t a decision today. It’s a preview of the discussion we will have next month.”

U.K. house prices increased 2.3 percent in the three months through April compared with the previous quarter, Halifax said today. While prices declined 0.2 percent in April from March, the mortgage unit of Lloyds Banking Group Plc said monthly changes are volatile.

The Royal Institution of Chartered Surveyors said home prices remain on a “firmly upward trend” that is set to continue even as a report showed its house-price index dropped to 54 in April from 57 a month earlier.

BOE Deputy Governor Jon Cunliffe said last week that spiraling property prices are the most pressing risk to Britain’s financial stability. Policy makers need to be “vigilant and ready to act” on the housing market, he said.

Rate Timing

The central bank will increase its key rate by 25 basis points, or 0.25 percentage point, by March 2015, according to one-month forward contracts for the sterling overnight interbank average, or Sonia. The Bank of England’s main rate has been at 0.5 percent since March 2009.

Sterling has jumped 9.5 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as the economic recovery fuels bets the Bank of England will raise interest rates. The euro gained 5.3 percent, while the dollar weakened 0.6 percent.

“Sterling is attracting a lot of attention,” said Harry Adams, head of trading at Argentex LLP, a currency advisory company in London. “Although rate hikes are unlikely to be this year, you’re seeing a lot of investors covering themselves in case the data continues to improve at the same sort of level it has been over the last three to six months.”

Benchmark 10-year gilt yields were at 2.65 percent. The price of the 2.25 percent bond due in September 2023 was 96.735.

Gilts returned 3.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities also earned 3.2 percent and Treasuries gained 2.7 percent.

To contact the reporter on this story: Eshe Nelson in London at enelson32@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins, Lukanyo Mnyanda

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