Sterling rose over 1 percent against the euro on Monday, on track for its biggest daily gains in two months, as the single currency weakened broadly after Greece and its European creditors reached agreement on a new debt deal for Athens. With no major UK economic data releases, events or policymaker speeches on Monday, the pound was largely at the mercy of the euro's fluctuations.
Traders bet the agreement will mean monetary policy differentials will weigh on the euro again, with the European Central Bank continuing its 1 trillion euro bond-buying programme and the US Federal Reserve inching closer to raising interest rates. This pushed the euro down 1.3 percent against sterling to 71.025 pence, a one-week low. Against the dollar, the pound inched up 0.1 percent to $1.5540. "Sterling is the outperformer of the day, even outperforming the dollar, which is somewhat of a surprise given that we've seen a kind of risk-on type move," said Hamish Pepper, FX strategist at Barclays in London.
"A 'moving back to fundamentals' story makes sense ... We're in an environment where the Fed will probably start to move rates higher later in the year, and if you're talking about the next major bank to follow them it probably will be the Bank of England." The Bank of England kept its benchmark interest rate at the record low of 0.5 percent last week as policymakers grapple with how to balance Britain's improving wage growth against more ominous signals from the global economy. Strategists are split over when the central bank will begin increasing rates, although the consensus is for the middle of next year.
The Greek deal, which keeps the almost-bankrupt country in the euro zone, was reached after a whole night of haggling at an emergency summit in Brussels. "The content of the deal may not be quite as positive as the headline," said Neil Jones, head of hedge fund FX sales at Mizuho in London, on why the euro had reversed initial gains. The pound may take its cue from UK inflation figures on Tuesday and earnings growth data on Wednesday.
British government bond prices fell sharply along with US Treasuries as investors flocked to riskier assets such as equities following Greece's debt deal. At 1419 GMT, the 10-year gilt yield was up around 5.5 basis points on the day at 2.133 percent, having earlier touched its highest level since July 2 at 2.168 percent.