Pound Strengthens Versus Euro on BOE Rate Bets; Gilts Decline

The pound strengthened against the euro this week, posting the biggest monthly gain in a year, as investors bet the Bank of England will raise interest rates sooner than it projects amid better-than-forecast economic data.

Gilts fell for a sixth week, the longest losing streak since June 2007, after BOE Governor Mark Carney failed to convince markets that policy makers will keep rates at an all-time low at a speech on Aug. 28 as he offered to ease liquidity rules for U.K. banks. Two-, five- and 10-year gilt yields have climbed since Carney said Aug. 7 that officials will not consider raising rates before unemployment reached 7 percent so long as price and financial stability aren’t jeopardized.

“We were bearish on the pound going into the speech and we came out it quite disappointed,” said Michael Sneyd, a currency strategist at BNP Paribas SA in London. “Carney didn’t seem too concerned about the rise in short-term yields. We thought he could have been more aggressive. Sterling has strengthened against the euro after the event.”

The pound advanced 0.7 percent this week to 85.31 pence per euro at 5 p.m. London time yesterday, having strengthened 2.5 percent in August, the biggest monthly gain since July 2012. The U.K. currency weakened 0.6 percent this week to $1.5470.

The pound strengthened at least 0.5 percent against all of its 16 major peers this month as Citigroup Inc.’s Economic Surprise Index for the U.K. rose to the highest level on Aug. 19 since November, indicating data has beaten analysts’ estimates.

Forecasts Raised

The British Chambers of Commerce yesterday raised its economic forecasts and said U.K. gross domestic product will increase 1.3 percent this year, up from a previous projection of 0.9 percent. Separate reports showed mortgage approvals rose to 60,624 in July, the most in more than five years, while GfK NOP Ltd.’s consumer sentiment index increased to minus 13 this month, the highest since October 2009.

An gauge of services output based on a survey on purchasing managers expanded for an eighth month in August, according to the median estimate of 26 economists in a Bloomberg News survey before the data is published on Sept. 4.

Bank of England policy makers have kept the main interest rate at a record-low 0.5 percent since March 2009 and will announce their next decision on Sept. 5.

The 10-year gilt yield increased six basis points, or 0.06 percentage point, to end the week at 2.77 percent. The rate rose to 2.84 percent on Aug. 29, the highest since Aug. 1, 2011. The 2.25 percent bond due in September 2023 fell 1.01, or 10.10 pounds per 1,000-pound face amount, to 95.465.

The Debt Management Office is scheduled to auction 1.5 billion pounds of inflation-linked bonds due in 2024 on Sept. 3, as well as 2.5 billion pounds of bills on Sept. 6.

Gilts lost investors 3.5 percent this year through Aug. 29, according to Bloomberg World Bond Indexes. German bonds dropped 2.2 percent and Treasuries declined 3.2 percent.

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