Pound Jumps Versus Euro After BOE, Retail Sales Damp Easing Bets

The pound posted its biggest weekly gain in more than a month against the euro after the Bank of England damped speculation it will undertake additional economic stimulus measures that would debase the currency.

Sterling extended its gains as a March 21 report showed retail sales jumped more than economists predicted last month, further weakening the case for monetary easing through asset purchases. The U.K. currency jumped and government bonds rose for a second week as Cyprus’s lawmakers struggled to strike a deal on unlocking rescue funds to avert a financial collapse. Chancellor of the Exchequer George Osborne kept the central bank’s inflation target at 2 percent in his March 20 budget.

“The pound is in the process of correcting, or pricing out, this aggressive monetary easing that was completely priced in,” said Eimear Daly, a currency analyst at Monex Europe Ltd. in London. “We are seeing more traction in the U.K. economy.”

The pound advanced 1.3 percent in the week to 85.35 pence per euro at 5:18 p.m. London time yesterday, after appreciating to 84.85 pence, the strongest level since Feb. 11. Sterling rose 0.7 percent to $1.5212, adding to its 1.3 percent advance in the five days through March 15.

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

Minutes of the Bank of England’s March policy meeting, released three days ago, showed some officials saying more bond purchases may cause an “unwarranted depreciation of sterling.” The central bank last increased the asset-buying target in July, raising it by 50 billion pounds to 375 billion pounds.

Quantitative Easing

Sterling has advanced 1.2 percent in the past month, the second-best performer after the Australian dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro declined 1 percent and the dollar rose 0.8 percent.

Even so, the pound has depreciated 4.5 percent this year on concern weak economic data will compel the central bank to expand its so-called quantitative easing program. Minutes of the March gathering showed Governor Mervyn King and two colleagues on the nine-member Monetary Policy Committee voted for a second month to expand the asset-purchase target.

A government report on March 27 will confirm that the British economy contracted 0.3 percent in the fourth quarter, while the next day, GfK NOP Ltd. will say March consumer confidence fell, according to Bloomberg surveys of economists.

Gilts rose this week as investor concern that a banking crisis in Cyprus would spread turmoil in the euro area boosted demand for alternatives to the region’s assets.

Yields on the 10-year gilt fell eight basis points, or 0.08 percentage point, to 1.85 percent. The 1.75 percent bond due September 2022 gained 0.72, or 7.20 pounds per 1,000-pound face amount, to 99.11.

U.K. government bonds returned 1.1 percent this month through March 21, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 0.6 percent, while Treasuries fell 0.1 percent.

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