The pound weakened for the first in three days versus the euro on speculation improving confidence and house prices aren’t enough to shore up the recovery and convince the Bank of England to raise borrowing costs. Sterling declined against most of its 16 major peers. An index of sentiment rose 10 points to minus 21 in May from the previous month, the highest in five months, GfK NOP Ltd. said. The gain may be partly due to a “feel-good factor” following two consecutive four-day holiday weekends and the wedding of Prince William and Kate Middleton at the end of April, according to GfK. House prices increased 0.3 percent this month, a separate report showed, beating the median economist estimate. “Although we’ve seen a few more positive data releases this week, it’s largely a blip in what we’ve seen over the past couple of months,” said Chris Walker, a currency strategist at UBS AG in London. “The U.K. picture remains very bearish, interest rate expectations have come off massively. The pound should stay under pressure.” Sterling declined 0.6 percent to 86.78 pence as of 2:07 p.m. in London. It reached 86.11 pence yesterday, the strongest since March 11. The pound added 0.1 percent to $1.6422 and was little changed at 133.29 yen. The increase in U.K. consumer sentiment was the biggest since May 1993 and lifts the gauge from a level equal to that seen in the depth of the recession in February 2009. Wedding ‘Euphoria’ “The gain in consumer confidence is due to the good weather and the euphoria of the Royal Wedding,” said Michael Derks, chief strategist at FXPro Financial Services Ltd. in London. “For the most part, consumer confidence is still very depressed and I expect that to continue to pressure the pound.” The pound has gained 0.2 percent over the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro has weakened 2.4 percent over the same period, and the dollar has appreciated 1.3 percent, the indexes show. U.K. central bank officials are locked in a debate over whether to tighten monetary policy after inflation accelerated to 4.5 percent in April, the fastest since 2008. Bank of England Governor Mervyn King says it’s too soon because the recovery remains weak. The European Central Bank and Sweden’s Riksbank have already started raising rates. Key Rate Money markets price in a 25 basis-point increase in the key rate in February, according to sterling overnight interbank average forwards, Tullett Prebon Plc data show. As recently as February investors bet the rate would be lifted this month. The pound’s depreciation against the euro trimmed its weekly advance to 0.4 percent. It has gained versus Europe’s shared currency in two of the past three weeks as euro-region policy makers clashed over how to resolve Greece’s debt woes. Luxembourg Prime Minister Jean-Claude Juncker, who heads a group of euro-area finance chiefs, said yesterday the International Monetary Fund may not release its share of a 12 billion-euro aid package to Greece next month. Sterling has appreciated 1.3 percent against the dollar this week, climbing 0.8 percent yesterday, as a report showed U.S. gross domestic product grew at a less-than-forecast 1.8 percent annual rate in the first quarter. The median forecast was for a 2.2 percent increase. U.K. government bonds were little changed, with the yield on the 10-year gilt at 3.32 percent. Two-year note yields stayed at 0.94 percent. Gilts have handed investors a gain of 2.3 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. German bunds are little changed, while U.S. Treasuries gained 2.6 percent, the indexes show. To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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