Bloomberg News

Pound Reaches One-Week High Versus Euro on Greek Aid Deal Delay

February 15, 2012

Feb. 15 (Bloomberg) -- The pound reached the strongest in a week against the euro amid speculation a Greek aid package may be delayed until after April elections, spurring demand for alternatives to the 17-nation currency.

Benchmark 10-year gilts rose as Greek Finance Minister Evangelos Venizelos said Europe is “playing with fire” by delaying a bailout decision and Reuters reported a deal may not be ready until after April elections. Sterling weakened against higher-yielding currencies such as the New Zealand and Australian dollars after the Bank of England said the U.K. economy is likely to remain “weak” and a report showed U.K. jobless claims rose more in January than economists forecast.

“There’s a broad based euro sell-off,” including against the pound, after the news on the Greek aid deal, said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “The Bank of England didn’t really tell the market anything it didn’t already know. It said the outlook was poor and that the main risks were coming from the euro-region.”

The pound rose 0.4 percent to 83.40 pence per euro at 3:37 p.m. in London, after reaching 83.34 pence, the strongest since Feb. 8. It was little changed at $1.5691. Sterling slid 0.5 percent to 53.38 pence per New Zealand dollar, after falling to 53.66 pence, the weakest since Aug. 2.

Venizelos leveled the accusation after a decision slated for tonight on aid for Greece totaling 130 billion euros ($171 billion) was postponed until Feb. 20 at the earliest. The package could be put off until after the Greek elections in April, Reuters reported, citing European Union sources.

Gilts Fall

The 10-year gilt yield fell two basis points, or 0.02 percentage point, to 2.07 percent. The 3.75 percent bond due September 2021 gained 0.165, or 1.65 pounds per 1,000-pound face amount, to 114.455.

The Bank of England said in its Inflation Report that the economy remains feeble because of the government’s fiscal squeeze and the euro-area crisis.

“There continue to be substantial uncertainties surrounding the outlook,” the central bank said. Growth is “likely to remain weak in the near term, before gradually strengthening as households real incomes recover,” it said.

“The U.K. economy faces considerable downside risks and those are outlined” in the central bank’s report, said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “We are more on the pessimistic side. The pound weakened into the report, which overall is consistent with current market thinking.”

Inflation Report

The pound has declined 1.4 percent this year according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. Over the past 12 months, it slid 4.9 percent, the indexes show.

The central bank sees inflation at its 2 percent target by year-end before easing to 1.8 percent in two years, according to the Inflation Report. In November, it forecast inflation would slow to 1.7 percent at the end of this year and 1.3 percent at the end of 2013.

“People look at the inflation forecasts and see they are slightly higher so think there’s a reduced risk for more quantitative easing,” said John Hydeskov, chief analyst at Danske Bank A/S in London. “They didn’t rule out more asset purchases but they didn’t promise them either. I think the pound is going to weaken further,” because of the stimulus already in place, he said.

Jobless Claims

The number of people claiming jobless benefits rose by 6,900 to 1.6 million last month, the most since January 2010, the Office for National Statistics said. Unemployment measured by International Labour Organization methods jumped by 48,000 to 2.67 million in the fourth quarter, leaving the rate at 8.4 percent, the highest since 1995.

The Bank of England announced an additional 50 billion- pound program of bond purchases on Feb. 9 after gross domestic product contracted 0.2 percent in the fourth quarter. The Monetary Policy Committee kept its benchmark interest rate at a record-low 0.5 percent the same day.

Gilts have lost investors 1.3 percent this year, after returning almost 17 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

--Editors: Mark McCord, Nicholas Reynolds

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

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


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