Pound Traders Buoyed by ECB Seek Data Reassurance for Optimism

  • `Relatively strong' data show policy divergence with euro zone
  • Net cost of options on stronger pound highest since July

Currency traders are paying the most to insure against the pound climbing versus the euro since July after the European Central Bank signaled more stimulus is on the way. Next week, they’ll get a chance to scrutinize U.K. data for confirmation the Bank of England is more likely to be headed in the opposite direction.

Sterling climbed to its strongest level versus the euro in two months on Friday, while options prices signaled further strength amid an economic recovery that’s leaving Britain’s neighbors behind. A report on Oct. 27 will show the U.K.’s gross domestic product expanded 0.6 percent in the third quarter, according to a Bloomberg survey. Separate reports next week are forecast to show improvements in U.K. mortgage approvals and consumer confidence.

“We’ll stay relatively strong in terms of U.K. data,” said Neil Jones, London-based head of hedge-fund sales at Mizuho Bank Ltd. “The pound will stay relatively firm while the policy divergence continues. If anything it looks set to widen.”

The premium for three-month options granting the right to buy the pound against the euro versus those allowing for sales widened to 0.69 percentage point as of the 5 p.m. market close in London on Friday.

That’s up from 0.30 percentage point on Oct. 21, a day before ECB President Mario Draghi said officials would reconsider their quantitative-easing program in December. The gap was as much as 0.72 percentage point in favor of a stronger euro in April, the month before the U.K.’s national elections, closing-price data compiled by Bloomberg show.

The pound advanced 2.3 percent this week to 71.83 pence per euro, having touched 71.69 pence, the strongest level since Aug. 21. The weekly gain was the biggest since July. Mizuho’s Jones sees sterling appreciating beyond 70 pence this year.

Britain’s currency dropped 0.6 percent to $1.5347, ending three weeks of gains.

U.K. government bonds declined this week, with the 10-year yield rising six basis points, or 0.06 percentage point, to 1.86 percent. The 2 percent security due in September 2025 fell 0.54, or 5.40 pounds per 1,000-pound face amount, to 101.25.

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