BLBG: Pound Set for Record Weekly Gain Versus Euro as BOE Cuts Rates
The British pound rose, heading for a record weekly gain against the euro and its biggest jump versus the dollar since 1985, as the Bank of England slowed the pace of interest-rate cuts.
The advance today occurred even as the U.K. Office for National Statistics said factories raised prices at the slowest annual pace in a year and manufacturing extended its worst slump in almost three decades. U.K. policy makers cut the benchmark rate yesterday by 50 basis points to 1.5 percent, the smallest reduction of the past three, to ease the country’s first recession in 17 years.
“The correction in euro-pound has clearly been the main story of the week,” Steven Pearson, a foreign-exchange strategist at Merrill Lynch & Co. in London, wrote in a research note today. “While initially understandable in the context of an overshoot relative to metrics like short-term rate spreads, we would now caution against looking for too much in the way of further downward progress.”
The U.K. currency was at 89.43 pence per euro at 1:13 p.m. in London, from 90.06 pence yesterday, bringing its appreciation this week to 7 percent. The pound strengthened 5.2 percent against the dollar this week to $1.5297, its largest advance since March 1985.
This week’s gains followed a record 23 percent plunge against the euro last year, which brought the pound close to parity with the European currency. Sterling weakened to an all-time low of 98.03 pence per euro on Dec. 30.
‘Further Traction’
“The pound will gain further traction against the euro and dollar as monetary and fiscal authorities seek to preserve international investor interest in sterling-denominated assets,” said Stephen Gallo, head of market analysis in London at Schneider Foreign Exchange, which counts FTSE-listed companies and wealthy individuals among its clients. “Sterling’s recent declines prompted the Bank of England to take a much more cautious approach to cutting rates this month.”
Bundesbank President Axel Weber said yesterday in a speech in Cologne that the German economy, the euro region’s largest, may contract this year by more than the European Central Bank has forecast. The ECB will lower its main rate by 0.5 percentage point to 2 percent on Jan. 15, according to the median forecast of 31 economists surveyed by Bloomberg.
“The euro fundamentals are looking increasingly shaky,” Paul Robson, a currency strategist in London at Royal Bank of Scotland Group Plc, wrote in a research note that recommended selling the euro against the pound. “It’s clearer than ever the ECB has seriously misjudged the dire situation the region now finds itself in.”
Fibonacci Chart
The euro may fall to 88 British pence should the currency close below so-called support at 89.97 pence, based on trading patterns, said George Davis, chief technical analyst in Toronto at RBC Capital Markets.
The support level represents a 38.2 percent retracement of the euro’s rise to a record high of 98.03 pence on Dec. 30 from the Oct. 20 low of 76.94 pence, according to a series of numbers known as the Fibonacci sequence, he wrote in a research note yesterday. Support is where buy orders may be clustered.
U.K. government bonds rose, pushing the yield on the 10-year gilt down six basis points to 3.16 percent. The 5 percent security due March 2018 advanced 0.47, or 4.7 pounds per 1,000-pound ($1,530) face amount, to 114.49. The two-year gilt yield declined four basis points to 1.64 percent.
