Pound Appreciates Against the Euro on Monetary Policy Divergence

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Pound Appreciates Against the Euro on Monetary Policy DivergenceThe pound rose the second week against the euro to its highest level in two years on speculation the Bank of England may raise interest rates soon at a time when the euro-area is considering expanding stimulus.

The sterling rose 0.9 percent last week to touch 78.08 pence as of 5 p.m. London time on Friday. It touched 77.85 pence on Sept. 25, its highest level since July 2012. The pound dropped 0.2 percent to $1.6260.

“Euro-sterling has been the real driver this week,” Steven Saywell, a London-based global head of foreign-exchange strategy at BNP Paribas SA, told Bloomberg News. “You’ve had euro weakness and also relatively hawkish comments from Carney. That’s made the market re-think about the timing of the first U.K. rate hike. If you are bullish sterling, you want to play it short euro-sterling.”

Saywell expects the pound to rise to 76 pence per euro by the end of this year.

The gilts surged last week after rising tensions in the Middle East spurred investor demand for fixed-income assets. Yield on the 10-year gilt fell eight basis points, or 0.08 percentage point, to close at 2.47 percent. The 2.75 percent bond that matures in September 2024 appreciated 0.665 to 102.47.

The gilts have returned 7.4 percent in the year to Sept. 25, while the U.S. Treasuries have appreciated 3.8 percent and German bunds returned 7.1 percent.

Economists surveyed by Bloomberg News forecast a report due this week to show the U.K. economy rose 0.8 percent in the second quarter and mortgage approvals declined for the second successive month in August. 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