Sterling rises

Sterling inched back towards 18-month highs against the euro on Monday, helped by growing conviction that British interest rates will top euro zone equivalents for years to come. The euro was also heading back towards lows against the dollar hit immediately after cuts in interest rates by the European Central Bank last week; dealers said that was the main driver on a day that saw volumes of less than 50 percent of the past month's average.
"Sterling has held up quite well against the dollar given the euro's weakness, but there's been very little in it today for me," said the head spot currency dealer at one London-based bank dealing room. "It's one of those weeks where we're looking for a new impulse." The euro fell 0.3 percent on the day against the pound to 80.93 pence, holding just above the lows hit following the ECB meeting last week. Against the dollar, sterling inched down less than 0.1 percent to $1.6796.
"Ultimately our view is the moves by the ECB were modestly negative for the euro but it will probably take until later this year for the downward pressure on it to build," said Lee Hardman, a currency strategist with Bank of Tokyo-Mitsubishi-UTJ in London.
Wage and house price figures due on Wednesday could have the potential to weaken the pound, he said. "We have seen some more signs of slowing momentum in the housing markets. That is obviously a key concern for financial stability in the UK." The prospect of the Bank of England raising rates well before its peers in Europe and the United States is at the heart of sterling's surge over the past year, reflecting an economy that is doing better than many.
But the halt a month ago in the currency's march higher against the dollar underlines the doubts as to whether there is much juice left in that trade for investors. The difference in yields between British and German 10-year government bonds widened on Monday to its highest since 1997, albeit during quiet trading because of public holidays in parts of continental Europe.
Ten-year gilt yields rose more than four basis points on the day to 2.697 percent, while its spread over 10-year Bunds touched 133.2 basis points, the highest since the third quarter of 1997. The yield spread between British and German two-year government bonds also edged a couple of basis points higher. On Saturday, European Central Bank policymaker Benoit Coeure said extremely low euro zone interest rates would diverge from those in the United States and Britain for a number of years, and gilt yields rose. "That implies a widening of the spread in itself," said Marc Ostwald, strategist at Monument Securities, who also cited a big upward revision to growth forecasts from British manufacturers on Monday as another reason for gilts' underperformance.