Pound Strengthens Fifth Day Versus Euro on BOE Rate Speculation

The pound advanced to a 21-month high versus the euro, strengthening for a fifth day, as speculation the Bank of England will tighten policy this year contrasted with the European Central Bank’s outlook.

Sterling appreciated to the strongest level since 2008 versus the dollar, posting the longest run of weekly gains in more than 1 1/2 years, as reports this week showed manufacturing and construction growth accelerated in June. The data adds to signs of a strengthening U.K. economy and bolsters the case for the BOE to consider raising interest rates from a record low. The ECB yesterday reiterated its pledge to keep interest rates subdued. Government bonds were little changed.

“Over the next six-to-12 months I expect the euro-sterling downtrend to persist,” said Alvin Tan, a foreign-exchange strategist at Societe General SA in London. “Economic and policy divergence between the U.K. and the euro area are very clear. The BOE is set to tighten before the end of the year, in our view.”

The pound appreciated 0.1 percent to 79.26 pence per euro at 4:17 p.m. London time after touching 79.19 pence, the strongest level since September 2012. The U.K. currency has strengthened 1.1 percent this week.

Sterling was little changed at $1.7150 after rising to $1.7180, the most since October 2008. It has risen 0.7 percent in the week, the longest run of weekly gains since the period ended Sept. 21, 2012.

Economy Forecast

The manufacturing and construction data, together with expansion in the services sector, indicate the economy grew 0.8 percent in the second quarter, Markit Economics said yesterday. That would match the pace seen in the three months through March and push gross domestic product above its pre-crisis peak. The first official estimate for second-quarter GDP will be published on July 25.

The Bank of England is forecast to leave its key interest rate at a record-low 0.5 percent when it announces its latest policy decision on July 10. Investors are betting the BOE will raise the benchmark rate by February, Sonia derivatives contracts show.

The ECB yesterday kept its key refinancing rate at 0.15 percent, a level it was lowered to at last month’s meeting when policy makers added a range of stimulus measures to fend off deflation in the euro area. Also last month, officials for the first time imposed a negative deposit rate on lenders wanting to park cash with the central bank.

Further Easing

“The key ECB interest rates will remain at present levels for an extended period,” ECB President Mario Draghi said at a press conference in Frankfurt yesterday. “The combination of monetary policy measures decided last month has led to a further easing of the monetary policy stance. The monetary operations to take place over the coming months will add to this accommodation and will support bank lending.”

The pound rose 11 percent in the past 12 months, the best performer among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro climbed 2 percent and the dollar declined 3.7 percent.

Benchmark 10-year gilt yields were at 2.76 percent, having climbed 12 basis points, or 0.12 percentage point, in the week, the most since the five-day period ended Dec. 27. The price of the 2.25 percent bond maturing September 2023 was at 95.91.

Gilts returned 3 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities earned 4.6 percent and Treasuries gained 2.6 percent.

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