Pound Climbs to 21-Month High Versus Euro on Policy Gap

The pound appreciated to the strongest level in 21 months versus the euro as the European Central Bank’s pledge to keep interest rates low highlighted the divergence of its policy outlook from the Bank of England’s.

Today’s meeting, at which euro-area borrowing costs were kept unchanged at a record-low 0.15 percent, was the first since the ECB unveiled a range of stimulus measures last month to fight the threat of deflation. In contrast, Bank of England Governor Mark Carney has said the time to normalize U.K. rates is “edging closer.” The BOE will announce its latest monetary policy decision on July 10.

“The downtrend in euro-sterling remains firmly in place, reflecting building investor expectations that monetary policy will diverge between the BOE and ECB,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The trend is still strongly higher for the pound. Economic data is consistent with very robust growth.”

The pound appreciated 0.3 percent to 79.36 pence per euro at 4:27 p.m. London time after touching 79.34 pence, the strongest level since Sept. 27, 2012. Sterling slipped 0.2 percent to $1.7141 after rising to $1.7177 yesterday, the highest level since October 2008.

Sterling snapped a five-day gain versus the dollar as a report today from Markit Economics said its headline measure for services, the biggest part of the British economy, was at 57.7 in June, down from 58.6 in May, and below the 58.3 estimate of economists in a Bloomberg survey. Even so, the reading is above the 50 level that divides expansion from contraction.

Growing Economy

The services index, along with construction and factory surveys this week, indicate the economy grew 0.8 percent in the second quarter, according to Markit. Employment at U.K. services companies rose by a record last month amid brightening economic prospects, Markit said.

“The key ECB interest rates will remain at present levels for an extended period of time,” ECB President Mario Draghi said at a press conference in Frankfurt after policy makers left borrowing costs unchanged.

The pound rose 9.7 percent in the past 12 months, the best performer after the New Zealand dollar among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes, as the strengthening economy boosted the case for the Bank of England to lift borrowing costs from a record low 0.5 percent. The euro climbed 1.5 percent and the dollar declined 3.4 percent.

U.S. employers added 288,000 jobs after hiring 224,000 workers in May, Labor Department figures showed today in Washington. The median forecast in a Bloomberg survey of economists called for a 215,000 advance. The unemployment rate fell to an almost six-year low of 6.1 percent.

Benchmark 10-year gilt yields rose one basis point, or 0.01 percentage point, to 2.76 percent. The 2.25 percent security due September 2023 fell 0.065, or 65 pence per 1,000-pound face amount, to 95.895. The five-day streak of rate increases is the longest since May 22.

Gilts returned 3 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities earned 4.6 percent and Treasuries gained 2.8 percent.

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