Thursday, 6 March 2014

Pound Weakens Most in a Month Versus Euro on ECB; Gilts Decline

  Mar 6, 2014 8:40 AM PT
The pound weakened the most in more than a month against the euro as European Central Bank President Mario Draghi raised forecasts for euro-area growth this year, boosting the relative allure of the shared currency.
U.K. 10-year bonds fell with German bunds. The pound depreciated against most of its 16 major peers, declining most against the Australian dollar, as the Bank of England kept interest rates at a record low. Policy makers held their bond-purchase stimulus target at 375 billion pounds ($628 billion) and said they would reinvest 8.1 billion pounds of funds related to the plan starting March 10.
“This is a pure euro story,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London. “It certainly seems that sterling is an innocent bystander in this afternoon’s market volatility.”
The pound slid 0.7 percent to 82.73 pence per euro at 4:32 p.m. London time, the biggest decline since Feb. 3. The currency was little changed at $1.6738 after climbing to $1.6823 on Feb. 17, the strongest since November 2009.
The pound declined to the weakest since Feb. 12 versus the euro after the ECB raised its growth forecast for gross domestic product in the currency bloc to 1.2 percent from 1.1 percent predicted in December. ECB policy makers kept the key interest rate at a record low 0.25 percent today, disappointing 14 out of 54 analysts surveyed by Bloomberg News who predicted a cut.

BOE Policy

The Bank of England’s decision to maintain the official bank rate at 0.5 percent was expected by all 52 economists in a separate Bloomberg survey. Analysts also forecast no change in the bank’s asset purchase plan.
The central bank said in a statement today it plans to reinvest 8.1 billion pounds “evenly across the three gilt-maturity sectors,” of three-to-seven years, seven-to-15 years and more-than-15 years in operations starting next week. The BOE said in its quarterly Inflation Report last month it intends to maintain the stock of purchased assets at least until the first increase in its benchmark rate.
The U.K. government has more than 35 billion pounds of 2.25 percent bonds maturing tomorrow, data compiled by Bloomberg show. The Bank of England’s holdings of the securities, purchased as part of the Monetary Policy Committee’s asset-purchase plan, have a face value of 8.2 billion pounds.
The 10-year gilt yield climbed five basis points, or 0.05 percentage point, to 2.77 percent. The 2.25 percent bond due in September 2023 fell 0.385, or 3.85 pounds per 1,000-pound face amount, to 95.71.

German Spread

Germany’s 10-year yield climbed four basis points to 1.65 percent, leaving the extra yield investors demand to hold the U.K. securities over bunds little changed at 112 basis points today. The spread reached 113 basis points in January, the widest since October 2005, based on closing-market data.
Sterling has appreciated 13 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, amid bets the central bank is moving toward raising interest rates. The euro advanced 7 percent, while the dollar slipped 0.5 percent.
“The pound may drift a little higher, but I wouldn’t want to be buying it,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “People are looking through the decision today and are considering the outlook for future policy.”
Gilts handed investors a loss of 1 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. U.S Treasuries dropped 1.3 percent, while German securities returned 0.8 percent.
To contact the reporter on this story: David Goodman in London at
To contact the editor responsible for this story: Paul Dobson at