Pound Gains Most in Two Years Versus Euro as ECB Weighs Stimulus

The pound posted its biggest weekly advance in almost two years against the euro as speculation the European Central Bank will start government-bond purchases stoked demand for the U.K. currency as a haven.

Sterling climbed to the strongest level since February 2008 versus the 19-member common currency after the Swiss National Bank unexpectedly removed its cap on the franc against the euro. ECB policy makers are set to meet in Frankfurt on Jan. 22. U.K. government bonds rose for a third week, pushing the 30-year gilt yield to a record low, after the slowest inflation in almost 15 years caused traders to abandon bets that the Bank of England will raise interest rates.

“What brought euro-sterling down was the thought that the Swiss National Bank must have known something,” said Nick Beecroft, a strategist at Saxo Bank A/S in London. “It will be an impressive shock-and-awe announcement.”

The pound advanced 2.5 percent to 76.17 pence per euro at 5 p.m. London time yesterday, after touching 75.96 pence. Sterling declined 0.1 percent to $1.5143.

ECB officials will weigh new stimulus, including quantitative easing, a policy that tends to devalue the local currency and may add to pressure on the franc against the euro. QE would also add to the pound’s strength, pushing it to 70 pence per euro by year-end, Beecroft estimates.

Gilts Climb

Benchmark 10-year government bond yields declined seven basis points, or 0.07 percentage point in the week, to 1.53 percent and touched 1.459 percent on Jan. 16, the lowest since August 2012. The 2.75 percent gilt due in September 2024 rose 0.6, or 6 pounds per 1,000-pound face amount, to 110.845. Thirty-year rates dropped as low as 2.181 percent, the least since Bloomberg began collecting the data in 1996.

The 10-year break-even rate, which provides a gauge of inflation expectations by measuring the yield difference between gilts and index-linked securities, dropped to as low as 2.45 percentage points on Jan. 13, the least since October 2012.

U.K. consumer prices advanced an annualized 0.5 percent in December after climbing at a 1 percent pace a month earlier, the Office for National Statistics said. That’s the lowest rate since May 2000.

Gilts returned 15 percent in 2014, outperforming U.S. and German securities, according to Bloomberg World Bond Indexes, as investors pushed back bets of higher interest rates by the Bank of England and growth stalled in the euro area. Minutes of the central bank’s Jan. 7-8 meeting will be published on Jan. 21.

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