The pound strengthened against the euro for the first time in five days as European stocks advanced and an index of commodities rose from a 16-year low, damping demand for Europe’s shared currency as a haven.
Sterling climbed from a level reached Monday that was its weakest in more than three months against the 19-nation single currency, amid a $2.7 trillion global equity wipeout. The pound touched a two-month high versus the dollar. The Stoxx Europe 600 Index of shares rose after plunging the most since December 2008 a day earlier. The U.K. currency extended gains after China cut its interest rates, in an attempt to stem the biggest stock market rout since 1996 and a deepening economic slowdown.
“Risk appetite is coming back a little bit into the markets,” said Richard Falkenhall, a trading strategist at SEB AB in Stockholm. “People also are taking profit on the trades they put on over the last few days,” boosting the pound against the euro, he said.
The pound strengthened 1.1 percent to 72.72 pence per euro as of 4:34 p.m. London time, after touching 74.23 pence on Monday, its weakest level since May 7. It plunged 1.5 percent against the euro on Monday, its steepest decline since October 2009. The U.K. currency fell 0.5 percent to $1.5698.
U.K. government bonds fell for the first time in five days. The yield on the 2 percent gilt due September 2025 rose nine basis points, or 0.09 percentage point, to 1.90 percent. The price dropped 0.79, or 7.90 pounds per 1,000-pound face amount, to 100.88.
While markets have pushed back their calls for when the Bank of England and the U.S. Federal Reserve will tighten monetary policy amid the recent equity selloff, both are seen as being the first major central banks to increase interest rates.
Forward contracts based on the sterling overnight index average, or Sonia, show traders aren’t pricing in a 25 basis-point increase to the BOE’s main rate until beyond October 2016.
Last week, markets suggested they were pricing in a move next August.
“Looking beyond China” the BOE’s first rate increase since 2007 and an improving economic outlook in the U.K. makes sterling one of the “top picks” among Group-of-10 currencies, according to analysts at Credit Agricole SA led by Valentin Marinov, the London-based head of G-10 foreign-exchange strategy.
Britain’s domestic economy will show resilience and diverge from those of Japan and the euro area, they wrote in a note to clients. “We would be looking to buy the dollar and sterling, especially against the yen and the euro before long,” they wrote.