The pound had its biggest weekly gain since 2011 versus the euro amid speculation the Bank of England will refrain from extending stimulus, while its European counterpart may cut interest rates further.
Sterling rose against all but one of its 16 major counterparts this week after Bank of England Governor-designate Mark Carney suggested current monetary policy may be sufficient to support the economy even as he stands ready to add more stimulus if needed. European Central Bank President Mario Draghi said the recent appreciation of the euro could damp inflation. Gilts were little changed.
“The market had expected Carney to be very dovish based on his previous comments, but he made it clear he thinks the current Bank of England’s policy stance is appropriate,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The rally in sterling is driven by people scaling back their expectations of further stimulus.”
The pound rose 2.7 from last week to 84.61 pence per euro yesterday, the steepest weekly gain since the period ended Jan. 7, 2011. It climbed 0.7 percent to $1.5808, the biggest advance since Dec. 14.
While Carney said “slack in the economy” warrants sustaining aid, he focused less on whether that would mean further asset purchases and more on how to use communications to secure cheaper market borrowing costs and encourage greater spending by households and businesses.
Bank of England policy makers left the benchmark interest rate at a record-low 0.5 percent on Feb. 7 and held the asset- purchase target at 375 billion pounds, as predicted by all economists surveyed by Bloomberg News.
The 10-year gilt yield was little changed over the week at 2.10 percent. It rose to 2.17 percent on Feb. 4, the highest since April 20. The price of the 1.75 percent bond due September 2022 was at 97.
U.K. inflation held at 2.7 percent in January, the fastest rate since May, according to the median forecast of 26 analysts in a Bloomberg survey. The Office for National Statistics will publish the data on Feb. 12.
The yield difference, or spread, between 10-year gilts and similar-maturity bunds widened six basis points to 49 basis points. That’s the biggest increase since the five-day period ending Jan. 4. The spread was at 10 basis points on Aug. 6.
Gilts handed investors a loss of 2 percent this year through Feb. 7, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 1.3 percent and Treasuries fell 0.8 percent.
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