Pound Falls Versus Euro, Paring Biggest Weekly Gain in 4 Months

The pound dropped against the euro, paring its biggest weekly gain in four months, as waning concern about the...

The pound dropped against the euro, paring its biggest weekly gain in four months, as waning concern about the risk of the U.K. leaving the European Union coincided with signs of economic weakness.

Sterling completed its biggest weekly gain versus the dollar after the U.S. reported on Friday that wages unexpectedly declined in February, data that may diminish the chances of the Federal Reserve increasing interest rates any time soon. U.K. manufacturing data this week signaled the domestic economy is losing momentum, reducing the chances of the Bank of England raising its own benchmark rate. The euro was also supported as traders assess the chances of additional stimulus from the European Central Bank next week.

Britain’s currency declined more than 4 percent versus the dollar in the two weeks through Feb. 26 after Prime Minister David Cameron’s conclusion of negotiations with EU partners and London Mayor Boris Johnson’s subsequently declared support for the campaign to leave the bloc. It recovered this week, as proponents of staying in put their case forward, denting short positions on the pound.

A gauge of the currency’s volatility versus the dollar retreated from its highest since 2011, signaling anxiety was easing that the June 23 referendum would hurt sterling.

“In the past few days the pound rallied very strongly, and I sense there was some unwinding of sterling-short positions, which may have run its course,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “We’ve had weak data this week but the pound didn’t go down, and that tells me people were aggressively unwinding short positions.” A short position is a bet that an asset will lose its value.

The pound weakened 0.1 percent to 77.40 pence per euro, as of 4:44 p.m. London time, leaving its weekly gain at 1.8 percent, the biggest since October. Sterling advanced 0.5 percent to $1.4243, pushing its weekly advance to 2.7 percent weekly advance, the most since 2009.

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Six-month implied volatility for the pound versus the dollar, a measure of price swings based on options, dropped for a fourth day, reaching 12.82 percent on Friday. It climbed to 13.64 percent on Feb. 24, the highest since September 2011 based on closing prices.

U.K. government bonds slid with their peers in their U.S. The gilt 10-year yield rose five basis points, or 0.05 percentage point, to 1.48 percent. The 2 percent security due in September 2025 fell 0.49, or 4.90 pounds per 1,000-pound face amount, to 104.555. The yield has increased from 1.226 percent on Feb. 11, the lowest since Bloomberg began collecting the data in 1989.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net. To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net, Todd White, Keith Jenkins

By: Lukanyo Mnyanda

©2016 Bloomberg News

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