The pound advanced toward a seven-year high against the euro as the common currency was weighed down by Greece’s lack of progress in talks with its creditors.
Investors sought the relative safety of the pound, with a deadline for Greece to make payments to the International Monetary Fund days away, and a solution to its debt crisis still proving elusive. U.K. government bonds climbed. Sterling has gained against all but one of its 16 major peers so far this quarter on signs of an improving U.K. economy, which raises prospects of monetary tightening by the Bank of England.
“Risk aversion is helping sterling against the euro,” said Adam Myers, the European head of foreign-exchange strategy at Credit Agricole SA’s corporate and investment-banking unit in London. “As problems with Greece continue to intensify, sterling is being seen by many foreign investors as an unlikely safe haven.”
The pound appreciated 0.3 percent to 70.78 pence per euro as of 4:23 p.m. in London. Earlier it touched 70.65 pence per euro, close to the 70.14 pence level reached on March 11, its strongest against the euro since November 2007. Sterling fell 0.5 percent to $1.5401.
Myers forecasts sterling will appreciate to 68 pence per euro by the end of June.
The pound gained against the euro after an index of U.K. retail sales rose to 51 in May, beating the previous reading of 12, the Confederation of British Industry said on Tuesday. The median estimate of economists in a Bloomberg survey was 20. This follows data last week where U.K. retail sales beat economists forecast in April.
“The U.K. does seem to be powering ahead,” said Brenda Kelly, head of foreign exchange at London Capital Group, in an interview on Bloomberg Television’s Countdown with Manus Cranny, Mark Barton and Caroline Hyde.
“On a year-on-year basis it looks fairly positive for the U.K.,,” Kelly said. “The BOE will more than likely move before the Fed when it comes to tightening monetary policy. Early next year is the most likely scenario.”
Current market pricing indicates the traders are betting that the Fed will raise interest rates before the BOE. The yield on two-year U.S. Treasury notes is nine basis points higher than similar-maturity U.K. gilts. Back in November, U.K. rates were higher than those in the U.S. when investors were expecting the BOE to move first.
The yield on benchmark 10-year gilts fell five basis points, or 0.05 percentage points, to 1.88 percent. The 5 percent bond due in March 2025 rose 0.535, or 5.35 pounds per 1,000-pound face amount, to 127.8.