Pound Advances Against Euro for Second Day Before BOE Minutes

By Andrew MacAskill

July 23 (Bloomberg) -- The pound strengthened against the euro for a second day and was little changed versus the dollar before the Bank of England publishes the minutes of its latest policy meeting.

The British currency rose to 79.08 pence as of 8:02 a.m. in London, from 79.24 pence yesterday. It was at $1.9920, from $1.9917. The pound has dropped 7 percent versus the euro this year and risen 0.5 percent against the dollar.

Slowing economic growth and the prospect of cuts in the central bank's benchmark interest rate will weaken the pound to $1.90 and to 80 pence per euro by year-end, according to the median forecast of analysts and strategists surveyed by Bloomberg. The central bank left its key rate at 5 percent on July 10. The minutes are due to be published at 9:30 a.m. London time today.

The chances that policy makers will cut interest rates rose yesterday, with the implied yield on the December short-sterling futures contract falling 4 basis points to 5.87 percent.

U.K. government bonds fell today, with the yield on the 10- year gilt rising 5 basis points to 5.04 percent. The price of the 5 percent security due March 2018 declined 0.34, or 3.4 pounds per 1,000 pound ($1,992) face amount, to 99.69. The two-year note yield advanced 4 basis points to 5.07 percent, after sliding 7 basis points yesterday.

`Focus On Growth'

``The attention has shifted away from inflation significantly and the market is focusing on growth and recession issues,'' said Matteo Regesta, an interest-rate strategist in London at BNP Paribas SA, France's biggest bank. ``The tone remains bullish towards gilts right now.''

Gilts may be supported as traders bet policy makers will cut interest rates amid evidence a slump in the housing market is deepening. The central bank has lowered the key rate three times since November to buoy the economy, Europe's second-largest.

The Bank of England must act quickly to cut rates to avoid a slowdown similar to the one in the U.S, policy maker David Blanchflower told the Guardian newspaper in an interview published July 21. His colleague, Andrew Sentance, said July 17 he's been ``particularly struck'' by the jump in inflation and he considered voting for higher interest rates last month.

Gains in gilts will lower the yield on the 10-year note to 4.84 percent by year-end, according to a Bloomberg survey. Bond yields move inversely to prices.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net