The pound rose against the euro for a second day, strengthening to 91 pence for the first time in almost three weeks, on speculation interest-rate cuts will revive the British economy faster than the common-currency region. The British currency also gained versus the yen and the Swiss franc as the FTSE 100 Index of U.K. shares climbed for a sixth day. Europe’s manufacturing and service industries contracted for a seventh month in December as the economy slid deeper into a recession, a report showed today. “Oversold sterling is getting a bit of a bounce,” said Jeremy Stretch, a senior currency strategist at Rabobank International in London. “The markets are waking up and realizing that the eurozone garden is not particularly rosy.” The pound advanced as much as 2.1 percent against the euro to 90.87 pence, before trading at 90.90 pence as of 4:27 p.m. in London. It jumped as much as 3.7 percent yesterday, the most since the creation of the single currency in 1999. Against the dollar, the pound was at $1.4740, from $1.4700. The pound slid 23 percent against the European currency last year, its biggest decline since the euro debuted, as the Bank of England cut rates deeper than the European Central Bank and the British economy entered its first recession in 17 years. Europe’s inflation rate slowed to 1.6 percent in December, the lowest level in more than two years, as oil prices plunged and consumer spending slumped, increasing the scope for the ECB to reduce borrowing costs further. Recession Deepens A composite index of manufacturing and service industries in the euro region dropped to 38.2 in December, the lowest since the survey began in 1998, from 38.9 in November, according to a survey of purchasing managers by Markit Economics in London. The pound may still fall to parity with the euro as the Bank of England cuts interest rates at a quicker pace than the ECB, according to Richard McGuire, a senior fixed-income strategist in London at Royal Bank of Canada, the country’s biggest lender. “We think U.K. rates will fall to 0.5 percent as early as next month, which should weigh on the pound,” McGuire said. “Meanwhile the ECB is expected to pursue a comparatively gradualist approach to policy easing.” U.K. services from restaurants to airlines shrank at close to the fastest pace in at least a dozen years and house prices fell by the most since 1991, data showed today, suggesting that the recession is intensifying. ‘Flight to Quality’ An index based on a survey of about 700 service companies by the Chartered Institute of Purchasing and Supply was at 40.2 in December, compared with November’s 40.1, which was the lowest since the gauge began in 1996, Markit said today. The average price of a home fell an annual 15.9 percent in December, Nationwide Building Society said in a separate report. U.K. government bonds fell, pushing the yield on the 10-year gilt up 11 basis points to 3.26 percent. The 5 percent security due March 2018 fell 0.92, or 9.2 pounds per 1,000-pound ($1,466) face amount, to 113.67. The two-year gilt yield slipped three basis points to 1.82 percent. “We have very serious doubts over whether this will amount to anything more than a short term pause in the ongoing flight to quality as the global economy continues to unravel,” said John Wraith, head of sterling-rate product development at Royal Bank of Canada in London. “With yields having fallen so far in such a short space of time over recent months, the correction could easily go a lot further over the days ahead.”

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