Pound Jumps Versus Euro as Draghi Increases Divergence With BOE

  • U.K. 10-year bonds yield most in two months versus bunds
  • BOE benchmark rate of 0.5% compares with zero in euro area

The pound advanced the most in more than a month against the euro as the European Central Bank’s expansion of monetary stimulus moved its policy further from that of the Bank of England.

Sterling climbed even as a report showed Britain’s construction output unexpectedly declined in January, adding to signs the economy is losing momentum. While slowing growth has prompted traders to push back wagers on higher borrowing costs from the BOE, the nation’s 0.5 percent benchmark rate compares with zero in the euro area, whose central bank also cut its deposit rate on Thursday to minus 0.4 percent.

Forward contracts based on the sterling overnight index average, or Sonia, show the chances of a 25 basis-point reduction by December at less than 10 percent, compared with 40 percent leading up to the ECB’s policy decision on Thursday. Sterling has strengthened about 2 percent versus the euro since falling to a 14-month low on Feb. 25, as concern over the U.K.’s possible exit from the European Union eased.

“At least the BOE is not on an easing path,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “We did have some speculation that they may cut and that actually weighed on the pound, and was certainly one reason we saw an underperformance. That has slowly been reversed since the end of February.”

The pound appreciated 1 percent to 77.51 pence per euro as of 4:54 p.m. London time, in the biggest gain since Jan. 22. Sterling rose 1.1 percent to $1.4436.

U.K. government bonds, which have delivered the biggest returns in the developed world this year, declined. Benchmark 10-year gilts had a second weekly drop, the first back-to-back declines in two months.

The 10-year gilt yield rose four basis points, or 0.04 percentage points, to 1.58 percent. The 2 percent security due in September 2025 fell 0.345, or 3.45 pounds per 1,000-pound face amount, to 103.715. The yield has climbed from 1.226 percent on Feb. 11, the lowest since Bloomberg began collecting the data in 1989.

The securities yielded 130 basis points more than similar-maturity German bunds, the most in two months, based on closing prices.

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