Pound Rises Versus Euro on Signs Central Bank Policies Diverging

The pound rose for a second week versus the euro on speculation the Bank of England is moving closer to raising interest rates while the European Central Bank signaled it may increase stimulus.

Sterling touched the strongest level in almost three months against the shared currency as data showed Britain’s services expanded more in April than analysts forecast. U.K. government bonds declined as both the Organisation for Economic Cooperation and Development and the National Institute of Economic and Social Research raised their predictions for British growth. The Bank of England will present its quarterly Inflation Report, including economic forecasts, on May 14.

“You have the ECB looking to eventually ease while for the Bank of England the market is trying to gauge the timing of a rate hike,” said John Hardy, the head of foreign-exchange strategy at Saxo Bank A/S in Copenhagen. “Assuming you get more supportive data out of the U.K. and especially if there is a stepping up of rhetoric next week at the Bank of England, euro-sterling should head to new lows.”

The pound appreciated 0.7 percent this week to 81.67 pence per euro at 5:03 p.m. London time yesterday, after reaching 81.63 pence, the strongest level since Feb. 17. The U.K. currency declined 0.1 percent to $1.6848. It climbed to $1.6996 on May 6, the highest since August 2009.

Higher Rates

Money markets that show investors are betting the Bank of England will raise interest rates within a year are adding to support for the pound, which has climbed 0.8 percent in the past month, the second-best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro weakened 0.4 percent amid bets additional ECB stimulus will push down interest rates and weigh on the currency. Norway’s krone was the best performer, gaining 0.9 percent.

A report next week will show the U.K. unemployment rate dropped to 6.8 percent in the three months through March, a five-year low, economists in a Bloomberg News survey said before the data is released on May 14.

“We see any setback in the pound as an opportunity to buy as data remains very supportive of the currency,” said Jane Foley, a senior currency strategist at Rabobank International in London.

Benchmark 10-year gilt yields are also diverging from their European counterparts. The U.K. rate rose four basis points, or 0.04 percentage point, to 2.69 percent this week as the price of the 2.25 percent bond maturing in September 2023 fell 0.335, or 3.35 pounds per 1,000-pound face amount, to 96.435. France’s 10-year yield fell three basis points to 1.90 percent.

Gilts returned 3.3 percent this year through May 8, according to Bloomberg World Bond Indexes. French bonds gained 4.2 percent, while Treasuries earned 2.7 percent.

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