Pound Posts Record Weekly Gain Against Euro as BOE Cuts Rates

By Matthew Brown

Jan. 10 (Bloomberg) -- The pound posted its biggest weekly gain since the common currency’s debut in 1999, as the Bank of England slowed the pace of interest-rate cuts.

The British currency also had its largest five-day advance versus the dollar since 1989 even as the 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 two days ago by 50 basis points to 1.5 percent, the smallest reduction of the past three.

“The correction in euro-pound has clearly been the main story of the week,” Steven Pearson, a foreign-exchange strategist in London at Merrill Lynch & Co., wrote in a research note. “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 pound rose 1.3 percent to 88.87 pence per euro late yesterday in London, for a weekly gain of 7.7 percent. The U.K. currency strengthened 4.3 percent against the dollar in the five days to $1.5167, its largest advance since July 1989.

The 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 Jan. 8 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 58 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 nine basis points to 3.14 percent. The 5 percent security due March 2018 advanced 0.71, or 7.1 pounds per 1,000- pound ($1,516) face amount, to 114.73. The yield on the note rose 10 basis points in the week. The two-year gilt yield declined 20 basis points in the five days to 1.58 percent.

To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net