Pound Posts Weekly Advance Versus Euro on Widening Inflation Gap

The pound posted a weekly gain versus the euro as reports strengthened speculation that the U.K. economy is recovering fast enough to withstand tighter monetary policy while European economies require more stimulus.

U.K. inflation accelerated last month toward the Bank of England’s 2 percent target while price increases in the euro area were less than half the European Central Bank’s goal, reports showed this week. Sterling fell for a third day against the dollar. British government bonds rose for a second day.

“The U.K. is just coasting toward monetary tightening, things are going very well,” said Neil Mellor, a currency strategist at Bank of New York Mellon in London. “There are only so many yield plays available and the pound by virtue of its fundamentals is one of them. The obvious one to buy it against is the euro.”

The pound was little changed at 79.19 pence per euro at 5:13 p.m. London time after touching 78.89 yesterday, the strongest level since September 2012. It strengthened 0.4 percent this week. Sterling slid 0.2 percent to $1.7067 after appreciating to $1.7192 on July 15, the highest since October 2008.

U.K. consumer prices rose 1.9 percent in June from a year earlier, up from 1.5 percent in May, the Office for National Statistics said on July 15. That was more than the 1.6 percent median forecast of 35 economists in a Bloomberg News survey. Two days later, the European Union’s statistics office in Luxembourg said annual consumer-price growth in the countries that share the euro stayed at 0.5 percent, supporting the case for more easing to accelerate price growth.

BOE Rates

The pound climbed 11 percent in the past year, the best performer among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes, as investors added to bets that the Bank of England will lead its major counterparts in raising interest rates. The euro rose 1.1 percent, while the dollar fell 2.4 percent.

The U.K. currency advanced against all but two of its 16 major peers today.

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting U.K. borrowing costs will increase 25 basis points by February. The U.K.’s benchmark interest rate is at a record-low 0.5 percent, compared with 0.15 percent in the euro area.

The yield on benchmark U.K. 10-year gilts fell two basis points, or 0.02 percentage point, to 2.57 percent, down three basis points this week. The price of the 2.25 percent bond maturing in September 2023 was at 97.405.

Gilts returned 4.3 percent this year through yesterday, Bloomberg World Bond Indexes show. That compares with a 5.5 percent gain for German securities and 3.6 percent for Treasuries.

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