Pound Advances Versus Euro Before BOE Minutes; U.K. Bonds Fall

The pound advanced against the euro for the first time in four days before the Bank of England publishes the minutes of its July Monetary Policy Committee meeting tomorrow and Governor Mark Carney speaks in Glasgow.

Sterling approached the strongest level in 22 months versus the shared currency after data showed the U.K.’s budget deficit was little changed in June even as an economic recovery boosted tax receipts. The pound is the best-performing currency in the past year among 10 peers amid speculation the Bank of England will increase interest rates before its U.S., euro-region and Japanese counterparts. U.K. government bonds fell as the nation sold 3.25 billion pounds ($5.5 billion) of 10-year securities.

“The market seems to be hanging on every hawkish word from Mark Carney,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International in London. “We are more likely to see a rate hike from the Bank of England in 2014 than we are from the European Central Bank or the Federal Reserve.”

The pound appreciated 0.3 percent to 78.97 pence per euro at 4:50 p.m. London time. It reached 78.89 pence on July 17, the strongest since September 2012. Sterling fell 0.1 percent to $1.7058 after rising to $1.7192 on July 15, the highest since October 2008.

Carney Speech

Minutes of the central bank’s most recent gathering will detail how the nine MPC members voted when the panel decided to keep borrowing costs at a record-low 0.5 percent on July 10. Also tomorrow, Carney is set to speak to an international business audience in Glasgow, part of a conference organized by Britain’s investment promotion agency.

The BOE governor said on July 15 that the timing of an increase in borrowing costs would be determined by the pace of the economic recovery after warning last month that an increase this year was more likely than investors were anticipating.

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.

U.K net borrowing was 11.4 billion pounds compared with 11.5 billion pounds a year earlier, the Office for National Statistics said today. That compares with a forecast of 11.1 billion pounds in a Bloomberg survey of economists. Government revenue rose 4.7 percent and spending grew 3.9 percent.

Improving Data

The pound rose 11 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes as improving economic data from gross domestic product to retail sales boosted expectations the central bank will increase borrowing costs. The euro rose 1.1 percent, while the dollar fell 1.3 percent.

The 10-year gilt yield increased two basis points, or 0.02 percentage point, to 2.59 percent after earlier climbing to 2.61 percent. The 2.25 percent bond maturing in September 2023 declined 0.145, or 1.45 pounds per 1,000-pound face amount, to 97.295.

“Given the strength of the U.K. data we would expect gilts to underperform in this sort of environment,” said Stuart Green, an economist at Santander SA in London. “The market may also be thinking about tomorrow’s MPC minutes, which will lead to some nervousness around the possibility of a surprise split in the vote.”

The U.K. Debt Management Office sold gilts maturing in September 2024 at an average yield of 2.70 percent.

Gilts returned 4.6 percent this year through yesterday, Bloomberg World Bond Indexes show. That compares with a gain of 5.5 percent for German securities and 3.5 percent for Treasuries.

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