Bloomberg News

Pound Gains Versus Euro, Gilts Rally, as ECB Rate Bets Trimmed

June 09, 2011

June 9 (Bloomberg) -- The pound gained versus the euro and gilts rallied as speculation the European Central Bank won’t raise interest rates as quickly as previously forecast prompted traders to favor sterling over Europe’s shared currency.

Sterling rebounded from within a penny of yesterday’s one- month low against the euro. The ECB kept its main interest rate unchanged at 1.25 percent and said inflation is unlikely to rise above 2.3 percent in 2012, trimming a previous forecast for 2.4 percent. President Jean-Claude Trichet still said the bank would maintain “strong vigilance” on inflation, a move interpreted as signaling a July rate increase. The BOE kept interest rates at a record low 0.5 percent today.

“Trichet may have used the term ‘strong vigilance’ but the rest of the speech was surprisingly dovish,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “That’s causing some liquidation out of long euro positions, which is pushing it weaker, including against the pound.”

The pound appreciated 0.3 percent to 88.61 pence per euro as of 4:09 p.m. in London. It slid to 89.18 pence, near the 89.76 pence reached yesterday, its weakest since May 5. The U.K. currency bought $1.6364, from $1.6404.

Sterling strengthened against most of its 16 major peers tracked by Bloomberg, posting its biggest gains versus the Swiss franc.

Record Low

Before today, sterling fell against the euro on all but one day this month as investors added to bets the central bank will keep interest rates at a record low while the government reduces spending to trim the U.K.’s fiscal deficit.

U.K. 10-year government bonds advanced for a second day, pushing the yield down two basis points to 3.27 percent. The two-year yield was little changed at 0.86 percent

Britain’s central bank has kept its main interest rate at near zero since March 2009, and bought 200 billion pounds of bonds under a so-called quantitative-easing program that ended in January 2010.

The yield on short-sterling futures for June 2012 fell three basis points to 1.22 percent, signaling investors were curbing bets for higher borrowing costs.

Traders are speculating that U.K. policy makers will raise the benchmark rate by 25 basis points in April, according to Tullett Prebon Plc data showing forward contracts on the sterling overnight interbank average. As recently as February, investors bet the rate would have been lifted last month.

--Editors: Mark McCord, Matthew Brown

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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