The pound climbed to the strongest level in a week against the euro after Greece’s rejection of austerity boosted the allure of relatively stable U.K. assets.
Sterling pared its advance later in the European morning amid optimism Greece will still secure a bailout, with European leaders due to meet on Tuesday for an emergency summit. British government bonds dropped, after gains earlier in the day that sent the 10-year yield to the lowest in three weeks.
The pound is the best-performing major currency of the past three months, and is benefiting from the prospect that data from housing to industrial production this week will confirm the U.K. economy is gaining momentum. On the other hand, Chancellor of the Exchequer George Osborne is due to present a special budget on Wednesday, where he may speed up spending cuts and fuel speculation the Bank of England will keep interest rates lower for longer.
“If the budget is austerity-heavy, spending-cut heavy, people will start pricing out interest-rate hikes or pushing them further into the future,” said Kathleen Brooks, the London-based European research director at Gain Capital Holdings Inc.’s Forex.com unit. On Greece, “it’s difficult to know where the market goes from here because we need to hear clearly from both sides, and we won’t hear until that summit,” she said.
The pound appreciated 0.6 percent to 70.92 pence per euro as of 4:36 p.m. London time, having touched 70.56 pence, the strongest level since June 29. The U.K. currency gained 0.1 percent to $1.5591.
Benchmark 10-year gilt yields rose one basis point, or 0.01 percentage point, to 2.01 percent. The yield fell earlier to 1.95 percent, the least since June 15. The 5 percent bond due in March 2025 declined 0.14, or 1.40 pounds per 1,000-pound face amount, to 126.15.
Thirty-year bonds underperformed before a sale of 1.75 billion pounds of 2045 securities on Tuesday.
The extra yield, or spread, that investors get for holding 30-year bonds instead of those due in 10 years was at 74 basis points, after being as much as 76 basis points, the highest since June 22 on an intraday basis.
“The 30-year auction on Tuesday is likely to entail some further concession on the curve, although there has already been a substantial steepening,” Societe Generale SA analysts including Jason Simpson, a London-based fixed-income strategist, wrote in a client note. “The Budget should be supportive for gilts with our expectations for a 10 billion cut to issuance.”
The pound has strengthened 6 percent in the past three months against a basket of 10 developed-nation currencies, the best performance in the group.
BOE policy makers led by Governor Mark Carney will keep interest rates at a record-low 0.5 percent on July 9, according to all 41 economists in a Bloomberg survey. Officials will maintain their asset-purchase program at 375 billion pounds, a separate survey suggests.