Pound Strengthens Versus Euro as EU Bond Plan Faces Resistance
The pound rose for the first time in four days against the euro as investors sought the U.K. currency as a haven amid concern measures announced last week to shore up the region’s debt markets will be blocked.
Sterling rose the most in two weeks against the 17-member currency after Finland joined the Netherlands in saying it opposed granting the European Stability Mechanism, the region’s permanent bailout fund, the ability to purchase bonds on the secondary market. Gilts gained after a U.S. report showed manufacturing unexpectedly contracted in June.
“Money is flying from the euro back to the U.K.,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. European Union “officials are infighting over whether or not ESM bond buying is permitted. Some member nations are voicing their plan to block the intervention and the market is losing confidence. Sterling remains a safe haven.”
The pound strengthened 0.5 percent to 80.23 pence per euro at 4:04 p.m. London time after rising as much as 0.6 percent, the biggest gain since June 18. The U.K. currency declined 0.2 percent to $1.5682.
Finland reiterated its opposition to bond buying by the ESM in the secondary market and said any purchases would require unanimity. The nation’s stance was announced in a report dated June 29 and presented today by Prime Minister Jyrki Katainen to the parliament’s Grand Committee in Helsinki.
Italy’s demand for direct bond buying by the aid funds in the secondary market is “not going to happen,” Dutch Prime Minister Mark Rutte said last week.
The pound was also supported after Prime Minister David Cameron said in an article in the Sunday Telegraph newspaper yesterday that he was not opposed to a popular vote on Britain’s membership of the European Union.
“A referendum in the U.K. is good for the pound,” Mizuho’s Jones said. “The U.K. will be deemed stronger if it quits the EU. Any official comment that alludes to a referendum will produce sterling demand.”
Sterling slid 0.5 percent against the euro on June 29 after EU leaders agreed to loosen bailout rules, lay the foundations for a banking union and break the link between sovereign and banking debt through the direct recapitalization.
The pound has strengthened 1.1 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar jumped 3.6 percent, and the euro weakened 2.8 percent.
Gilts advanced after the U.S. Institute for Supply Management said its manufacturing index fell to 49.7, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 in May. Figures below 50 signal contraction.
U.K. bonds rose earlier after British reports showed manufacturing output contracted and house prices stagnated last month, adding weight to calls for the Bank of England to expand stimulus measures this week.
The 10-year gilt yield dropped three basis points, or 0.03 percentage point, to 1.7 percent. The 4 percent bond maturing in March 2022 gained 0.33, or 3.30 pounds per 1,000-pound face amount, to 120.445.
The Bank of England will raise its target for bond purchases by 50 billion pounds to 375 billion pounds on July 5, according to 30 of 41 economists in a Bloomberg news survey. Eight predict an increase to 400 billion pounds, and the rest see a smaller gain or no change.
The Debt Management Office plans to sell 1.75 billion pounds of bonds due in December 2030 tomorrow, and 4.5 billion pounds of notes maturing in September 2017 the following day.
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