Pound Falls Versus Euro on Bets Cyprus Contagion to Be Contained

The pound fell from a five-week high against the euro as the bond markets of Europe’s most indebted nations rallied amid optimism Cyprus is moving closer to reaching agreement on an international bailout.

Sterling pared a second weekly gain versus the 17-nation currency after Averof Neofytou, deputy president of Cyprus’s ruling Disy party, said he believes lawmakers will reach a deal in the next few hours. The Cypriot parliament is seeking an agreement to unlock rescue funds to avert a financial collapse after Finance Minister Michael Sarris failed to gain support from Russia. U.K. government bonds gained for a second week.

“All the moves we are seeing in pound-euro are focused on Cyprus,” said Eimear Daly, a currency analyst at Monex Europe Ltd. in London. “Everyone is just waiting for any kind of headline to see if we are going to get some kind of resolution. It’s actually impressive how resilient the euro has been.”

The pound weakened 0.4 percent to 85.37 pence per euro at 5:14 p.m. London time after appreciating to 84.85 pence, the strongest level since Feb. 11. The U.K. currency has still risen 1.3 percent versus the euro this week. Sterling gained 0.3 percent today to $1.5212.

The pound stayed lower against the euro and pared its advance against the dollar after Fitch Ratings said it placed the country’s grading on a negative watch.

Italian Bonds

Cyprus is seeking to overcome a deadlock after lawmakers this week rejected a 5.8 billion-euro ($7.5 billion) levy on bank deposits imposed by the European Union as a condition for a 10 billion-euro rescue. The European Central Bank said it will cut emergency funds to Cypriot banks on March 25 unless a bailout program with the EU and International Monetary Fund is in place.

Italian 10-year bonds advanced for a third day, with the yield falling seven basis points, or 0.07 percentage point, to 4.52 percent, and similar-maturity Spanish securities dropped three basis points to 4.86 percent.

Benchmark 10-year gilts were little changed today at 1.85 percent having declined eight basis points this week. The price of the 1.75 percent bond due in September 2022 was 99.11.

Gilts advanced this week amid speculation turmoil in the euro region will underpin demand for the relative haven of U.K. government securities.

“The safe havens will remain well bid” including gilts, said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “There seems to be a belief they can’t really just let Cyprus go. We’ll see.”

U.K. government bonds have returned 1.1 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 0.6 percent and Treasuries fell 0.1 percent.