Pound Jumps 1% Against Euro as EU Inflation Slows; Gilts Decline

The pound jumped more than 1 percent against the euro, the biggest gain in six months, after euro-area inflation slowed and the jobless rate climbed to a record, boosting demand for alternatives to Europe’s shared currency.

Sterling advanced for a second day versus the euro as the reports spurred speculation the European Central Bank will cut interest rates as soon as its meeting next week to revive growth. The pound may extend gains, according to UBS AG. U.K. government bonds fell as an index of U.S. business activity expanded at the fastest pace since March 2011, damping investor appetite for safer assets.

“There’s a very sharp decrease in the euro-region inflation rate and the market is pricing in the ECB might take some more action,” said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt. “That’s reflected in a weaker euro.”

The pound advanced 1.1 percent to 84.70 pence per euro at 4:42 p.m. London time, the biggest gain April 25. The rally came after the U.K. currency slipped to 85.85 pence on Oct. 29, the weakest since Aug. 29. Sterling was little changed at $1.6047.

The ECB will cut its refinancing rate by a quarter percentage point to 0.25 percent at its Nov. 7 meeting, according to a research note from UBS. BNP Paribas SA, JPMorgan Chase & Co. and Scotiabank also changed their ECB calls today and now predict officials will lower rates in December.

Further Gains

There’s room for the pound to extend gains versus the euro because of the outperformance of the U.K. economy, said Geoffrey Yu, a senior foreign-exchange strategist at UBS in London.

Sterling will appreciate to 84 pence in three months and to 81 pence by the end of 2014, Yu said.

The euro area’s annual inflation rate fell to 0.7 percent, the lowest since November 2009, from 1.1 percent in September, the European Union’s statistics office in Luxembourg said. The median forecast in a Bloomberg News survey of economists was for it to stay at 1.1 percent. The data marks the ninth month the inflation rate has been less than the ECB’s 2 percent ceiling.

The pound has fallen 1.1 percent in the past month, the worst performer after the Canadian dollar of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar dropped 0.1 percent and the euro rose 0.8 percent.

The U.K. 10-year yield climbed eight basis points, or 0.08 percentage point, to 2.62 percent after declining to 2.52 percent, the lowest level since Aug. 13. The 2.25 percent bond due in September 2023 fell 0.655, or 6.55 pounds per 1,000-pound face amount, to 96.825.

Business Barometer

The MNI Chicago Report business barometer jumped to 65.9 from 55.7 in September, the biggest monthly increase in more than three decades. Readings above 50 signal expansion. The index exceeded the most optimistic estimate in Bloomberg survey.

U.K. home values rose 1 percent in October from the previous month when they climbed 0.9 percent, Nationwide Building Society said. GfK NOP Ltd. said its index of U.K. consumer sentiment declined to minus 11 from minus 10 in September. The economy grew 0.8 percent in the third quarter, the most since 2010, the government said last week.

“Gilts look pretty rich given the improving U.K. economy,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “The rally has probably gone as far as it can go.”

Ten-year yields will probably rise to 2.70 percent or 2.75 percent by year-end, Stamenkovic said. The rate will climb to 2.90 percent by Dec. 31, according to the median estimate of economists in a Bloomberg survey.

Gilts returned 1.4 percent in the month through yesterday, according to Bloomberg World Bond Indexes. Treasuries rose 0.5 percent and German bonds advanced 0.4 percent.

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