Pound Rises to 1-Week High Vs Euro on Greece, BOE Minutes
The pound rose to the strongest in a week against the euro after European finance ministers failed to agree on a debt-reduction package for Greece and as Bank of England policy makers signaled they won’t cut interest rates.
Sterling held a four-day gain versus the dollar after minutes of the central bank’s November meeting showed officials voted 8-1 to stop expanding the so-called quantitative-easing program this month. The majority of policy makers said uncertainty among consumers and companies may be affecting the impact of the stimulus program on the economy. U.K. government bonds were little changed.
“The fact that the Bank of England suggested it’s not going to cut rates any time soon is supportive for the pound,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “The central bank still leaves a door open for further stimulus. That, for me, is sterling positive. Uncertainty in the euro region also helps the pound.”
The pound gained 0.1 percent to 80.42 pence per euro at 4:38 p.m. London time after appreciating to 80.06 pence, the strongest since Nov. 14. The U.K. currency rose 0.1 percent to $1.5940 after reaching $1.5949, the highest level since Nov. 9.
European Union finance ministers ended a meeting in Brussels early today having failed to agree on a deal to steer an extra 32.6 billion euros ($41.8 billion) of aid to Greece over the next four years. They are also yet to find a way to contain the resulting increase in the nation’s debt, already the highest in Europe.
The Bank of England minutes showed that policy maker David Miles dissented from the majority on the Monetary Policy Committee, calling for a 25 billion-pound increase in the bond- purchase target to 400 billion pounds. The committee voted unanimously to keep its benchmark interest rate at a record-low 0.5 percent and said it was “unlikely to reduce” it in the foreseeable future.
Policy makers said a case could be made for further easing in monetary conditions, including “discouraging any further appreciation of sterling.” For Miles, the argument for more stimulus was “strong” due to the degree of slack in the economy, the minutes showed.
Traders see a 39 percent chance that policy makers will cut the benchmark rate to 0.25 percent at their next meeting on Dec. 5-6. That’s a decline from 41 percent a week ago, interest-rate swaps showed.
Sterling has strengthened 1.5 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 2.5 percent and the dollar dropped 1.3 percent.
The pound is poised to weaken to 83 pence per euro during the next six months as the risk of recession persists and inflation remains elevated, according to Nick Parsons, head of research for U.K. and Europe at National Australia Bank Ltd.
“The minutes today revealed the lack of policy options that face the Bank of England,” London-based Parsons said. “The market is underestimating the risk of a triple-dip recession. We think the pound is set for prolonged period of underperformance and it’s one of our least favorite picks.”
The U.K. budget deficit unexpectedly widened in October, a report showed today. The shortfall excluding government support for banks was 8.6 billion pounds compared with 5.9 billion pounds a year earlier, the Office for National Statistics said in London. The median of 25 estimates in a Bloomberg News survey was for a deficit of 6 billion pounds.
The yield on the 10-year gilt climbed one basis point, or 0.01 percentage point, to 1.85 percent after rising seven basis points yesterday. The 1.75 percent bond due in September 2022 fell 0.065, or 65 pence per 1,000-pound face amount, to 99.075.
Gilts returned 2.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 3.6 percent and U.S. Treasuries earned 2.4 percent.
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