Pound Set for Strongest Close Versus Euro Since 2007 Before ECB

The pound was set to close at its strongest level in seven years versus the euro as divergence in monetary policy between Britain and the currency bloc allowed investors to overlook a cooling in U.K. services growth.

While Markit Economics’s Purchasing Managers’ Index slipped to 56.7 last month, it was still higher than the 53.3 reading in a similar gauge for euro-area services. U.K. 10-year government bond yields touched the highest level this year as investors brought forward bets on an interest-rate increase.

The Bank of England, led by Governor Mark Carney, will announce policy tomorrow, while European Central Bank officials are set to unveil more details of their 1.1 trillion euro ($1.2 trillion) bond-buying plan. Sterling was also boosted against the euro Wednesday as Britain scored a victory in its bid to challenge European Union powers over the City of London.

“The euro is suffering a little bit as markets prepare for the ECB,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London.

The U.K. services number was “a little disappointing” but “it’s not exactly the worst-case scenario,” he said. “I suspect that sterling will remain pretty well supported.”

The pound gained 0.3 percent to 72.53 pence per euro at 6:04 p.m. London time, which would be the strongest closing level since December 2007. Sterling fell 0.6 percent to $1.5264.

Policy Decision

All 51 economists in a Bloomberg survey forecast the BOE will hold its key interest rate at a record-low 0.5 percent on Thursday, where it has been since March 2009.

Investors are currently fully pricing a 25 basis-point increase in U.K. borrowing costs by March 2016, compared with April on Monday, according to MPC-dated forward Sonia fixings data provided by ICAP Plc. That assumes the current four basis-point spread for Sonia fixings below the Bank Rate would return to zero once the BOE raises rates.

The yield on U.K. 10-year bonds increased three basis points, or 0.03 percentage point, to 1.88 percent and touched 1.89 percent, the highest since Dec. 24. The 5 percent gilt due in March 2025 fell 0.355, or 3.55 pounds per 1,000-pound face amount, to 128.38.

The ECB lacks legal powers to dictate the location of the clearing of euro-denominated trades, the EU’s General Court in Luxembourg ruled Wednesday as it backed British arguments. The ruling concerns the ECB’s policy requiring clearinghouses handling euro-denominated trades to be located in the 19-nation currency bloc, which the U.K. argued could see a fragmentation of clearing along currency lines.

“Euro-sterling got hit hard when this headline came out,” said Neil Jones, head of hedge fund sales at Mizuho Bank Ltd. in London. “From a money-flow point of view and from a financial-center point of view, it’s a clear boost for non-euro zone nations looking to clear euro-sterling.”

Gilts lost 0.8 percent this year through Tuesday, according to the Bloomberg World Bond Indexes. German securities returned 1.8 percent and Treasuries earned 0.5 percent, the indexes show.

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