The pound rose the most in 11 weeks versus the dollar after European Central Bank President Mario Draghi said officials were ready to act to counter the debt crisis, easing concern the turmoil will harm the U.K. economy.
Gilts tumbled, with 10-year yields climbing the most since March, as optimism over Europe and a U.K. report showing retail- price inflation accelerated in May, damped demand for the fixed returns from government debt. Gilts also declined on speculation the Bank of England will keep its program for bond purchases, or quantitative easing, on hold at a policy meeting tomorrow.
“There’s a slight improvement in risk appetite, which is helping the pound,” said Michael Derks, chief strategist at FXPro Financial Services Ltd. in London.
The pound strengthened 0.5 percent to $1.5465 at 4:24 p.m. in London after climbing as much as 0.9 percent, the biggest intraday gain since March 16. Sterling advanced 1 percent to 122.35 yen, and was little changed at 80.92 pence per euro.
The ECB kept its key interest rate at a record-low 1 percent and President Mario Draghi said officials will extend their offerings of unlimited cash to banks until the start of 2013 for periods up to three months.
“We monitor all developments closely and we stand ready to act” as the economy faces “increased downside risks,” Draghi said in Frankfurt after the policy meeting.
U.K. retail prices rose 1.5 percent last month from a year earlier, after gaining 1.3 percent in April, according to a report from the British Retail Consortium and Nielsen Co. Separate data today showed U.K. construction growth slowed in May, and business confidence declined.
“Sterling is doing well as we are seeing flows out of the dollar but nobody wants to start piling into the euro,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London.
The yield on the benchmark 10-year gilt climbed 13 basis points, or 0.13 percentage point, to 1.65 percent after rising as much as 14 basis points, the most since March 14. The 4 percent bond due March 2022 dropped 1.275, or 12.75 pounds per 1,000-pound face amount, to 121.07. The yield declined to a record 1.439 percent on June 1.
“The fact that the ECB hasn’t moved today has taken some pressure off the BOE to follow tomorrow,” said Philip Rush, an economist at Nomura International Plc in London. “We think there will be more QE from the BOE but that it will come in August, not tomorrow.”
The central bank left its target for bond purchases unchanged at its previous meeting on May 10. Morgan Stanley and Deutsche Bank AG both predict the Bank of England will resume the stimulus program tomorrow.
Gilts have returned 3.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4.8 percent, while Spanish debt has lost 3.7 percent.
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