Merrill Says Euro-Pound Gains Not Substantiated by Rate Spreads

By Daniel Tilles

Jan. 20 (Bloomberg) -- The euro’s gains against the pound aren’t justified by differences in interest rates, according to Merrill Lynch & Co.

“While the moves down in euro-dollar and pound-dollar are substantiated by interest-rate spreads, the move up in euro-pound is not,” Steven Pearson, a strategist at Merrill Lynch in London, wrote in an e-mailed report today. The pound weakened 0.8 percent against the euro to 91.36 pence as of 7:24 a.m. in London.

Investors should sell the U.K. currency against the dollar with a target of $1.32, Merrill Lynch said. The pound was at $1.4185, down 1.6 percent.

“Waning foreign demand for U.K. government-backed debt will make financing the U.K.’s stubbornly wide current-account deficit problematic,” Pearson also said.

To contact the reporter on this story: Daniel Tilles in London at dtilles@bloomberg.net