Pound Advances to 18-Month High against Euro on Monetary Policy Divergence

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Pound Advances to 18-Month High against Euro on Monetary Policy DivergenceThe pound rallied to an 18-month high against the euro after industrial output grew the most since 2011, as investors speculated that the economic recovery  will spur the Bank of England to hike interest rates soon at a time when the European Central Bank is boosting stimulus.

The pound continued with its gains for the fifth day, rising 0.1 percent to 80.85 pence per euro close to 5 p.m. in London after earlier rising to 80.64 percent, its highest level since December 2012. The pound declined 0.3 percent to $1.6753.

The U.K. 10-year gilts yielded the biggest returns compared to the German bunds ever since the euro was introduced. About 3.25 billion pounds ($5.44 billion) worth of gilts that mature in 2024 were sold today by the U.K.’s Debt Management Office.

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“Sovereign divergence is at work here,” Neil Jones, a London-based head of hedge-fund sales at Mizuho Bank Ltd. told Bloomberg. “Large investors around the world are reassessing their currency holdings and money is shifting from the euro zone to the U.K. That’s benefiting the pound.”

The Office for National Statistics reported that Britain’s industrial output rose 0.4 percent in April from a month ago, when it grew by 0.1 percent. On an annual basis, the industrial production grew 3 percent, the biggest increase since January 2011.

The pound has surged 7.9 percent in the past one year due to the strengthening economy, making it the best performing currency after the New Zealand dollar out of the 10 advanced-economy currencies monitored by Bloomberg Correlation-Weighted Indexes. The dollar has declined 0.6 percent while the euro has advanced 1.9 percent. To register for a free 2-week subscription to ForexMinute Premium Plan, visit www.forexminute.com/newsletter.

To contact the reporter of this story; Jonathan Millet at john@forexminute.com