Oct. 20 (Bloomberg) -- The pound fell against the euro and gilts declined on optimism progress is being made in agreeing a plan to end the European debt crisis.
Sterling weakened versus most of its 16 major peers tracked by Bloomberg as draft guidelines showed changes to the euro region’s revamped bailout fund that will be hammered out at a summit this weekend may open the door to “massive” credit lines for countries like Italy and Spain. Gilts declined for a second day after a report showed retail sales, including fuel, unexpectedly rose the most in five months in September.
“Expectations have been lowered so much that any sign of progress is seen as good news, so we’ve seen the euro rebounding” against the pound, said Ian Stannard, London-based head of European currency strategy at Morgan Stanley. “Any positive European news is going to see euro-sterling moving up towards the top end of the range.”
The pound weakened 0.3 percent to 87.53 pence per euro at 11:47 a.m. London time. It erased declines against the U.S. and Japanese currencies to trade little changed at $1.5790 and 121.31 yen.
The pound has slid 1 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which measure a basket of 10 developed-market currencies. It has gained 3.1 percent against the euro since the start of the second half as officials struggle to agree on a resolution to the area’s debt crisis.
The enhanced fund, called the European Financial Stability Facility, may be able to offer loans worth up to 10 percent of a member state’s gross domestic product in precautionary aid “before they face difficulties raising funds” in bond markets, the draft obtained by Bloomberg News shows.
The 10-year gilt yield rose two basis points, or 0.02 percentage point, to 2.49 percent. The 3.75 percent security maturing September 2021 declined 0.185, or 1.85 pounds per 1,000-pound face amount, to 110.98. The two-year note yield was little changed at 0.59 percent.
The U.K. sold 4.75 billion pounds of 1.75 percent securities maturing in January 2017 at an average yield of 1.547 percent, the Debt Management Office said. That’s up from 1.394 percent at the previous auction on Sept. 22. Demand rose to 1.7 times the amount of securities on offer, from 1.2 times.
Retail sales including fuel rose 0.6 percent from August, when they fell a revised 0.4 percent, the Office for National Statistics said today in London. That’s the biggest gain since April and compares with the median forecast of 23 economists in a Bloomberg survey for no change.
U.K. government debt has handed investors 12 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, surpassing the 6.7 percent gain for German bunds and 8 percent return for U.S. Treasuries.
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