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U.K. Pound Advances Versus Euro On Growth Outlook, Policy Split

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U.K. Pound Advances Versus Euro On Growth Outlook, Policy Split

The pound rose versus the euro, reaching a three-week high, as reports added to evidence the U.K. economy is withstanding the stagnation that may lead to more monetary stimulus for its euro-area neighbours.

Sterling advanced against all but two of its 16 major peers this week as Chancellor of the Exchequer George Osborne upgraded the U.K.’s growth forecast for next year during his Dec. 3 Autumn Statement.

A day later, the European Central Bank downgraded its forecasts for growth and inflation through 2016.

Britain’s government bonds dropped as the government said the budget deficit would be bigger than it earlier estimated.

“The divergence trade, which has been a major part for euro-sterling, is still with us,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “The trend is still for a weaker euro and stronger pound.”

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The pound gained 0.9 per cent in the week to 78.88 pence per euro as of 5 p.m. London time yesterday, touching 78.33 pence on Dec. 3, the strongest level since Nov. 12. Sterling dropped 0.4 per cent from the Nov. 28 close to $1.5590, a seventh week of declines.

The pound has advanced 5 per cent in the past year, the biggest advance after the dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, amid speculation the countries will lead the way in exiting extraordinary stimulus as their economies strengthen. The greenback surged 11 per cent, while the euro weakened 1.7 per cent.

Gilts Drop

Benchmark 10-year gilt yields rose nine basis points, or 0.09 percentage point, this week to 2.02 per cent. That was the biggest weekly increase since the period through Sept. 5. The 2.75 per cent bond due in September 2024 fell 0.86, or 8.60 pounds per 1,000-pound face amount, to 106.44.

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Britain will borrow 91.3 billion pounds in the current fiscal year, Osborne said, citing estimates from the Office for Budget Responsibility. The OBR forecast in March that borrowing would be 86.4 billion pounds after accounting changes that took effect three months ago.

Gilts fell with Treasuries yesterday and the pound weakened against the dollar after a report by the Labor Department in Washington showed employers in the U.S. added 321,000 jobs in November, the most since January 2012, up from a 243,000 gain in October that was stronger than previously reported.

Reports next week will show U.K. industrial and manufacturing production grew last month and construction increased in October, further highlighting the resilience of the U.K. economy, according to separate surveys.

News by Bloomberg, edited by ESM

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