Pound Gains Against Euro as Government Outlines Spending Cuts

The pound rose against the euro as U.K. Chancellor of the Exchequer George Osborne outlined budget cuts designed to start redressing the government budget deficit, the largest among the Group of Seven nations.

Sterling gained against nine of its 16 most-traded peers. Osborne, who became Chancellor on May 11, announced 6.25 billion pounds ($9 billion) of spending cuts today. He will set out broader plans in an emergency budget on June 22. Concern Britain will struggle to cut the deficit helped drive the U.K. currency 3.4 percent lower this year, according to Bloomberg Correlation- Weighted Currency Indexes. The euro tumbled 6.6 percent, the indexes show, as concern deepened the region’s debt crisis has yet to be solved.

“The market’s giving the new government a reasonable stay of execution, wanting to see how definitive they are in the budget-deficit stakes” said Jeremy Stretch, a senior currency strategist at Rabobank International in London. “The 6 billion pounds of cuts today are a step in the right direction. For now, markets are cautiously rewarding sterling.”

The U.K. currency appreciated 1.2 percent to 85.91 pence per euro as of 10:36 a.m. in London. The pound traded at $1.4459, from $1.4460 last week. It weakened to $1.4231 on May 20, its lowest level since March 30, 2009.

The pound may strengthen to 75 pence per euro this year as government debt has a smaller drag on growth in the U.K. than in the euro region, Standard Bank Plc said.

No Debt Crisis

“We do not believe that the debt crisis in the euro zone means that there will be a debt crisis in the U.K.,” said Steven Barrow, head of G-10 currency research at Standard Bank in London . “The government’s budget deficit may be higher than most in the euro zone, but high deficits alone do not spell debt downgrades.”

Government bonds were little changed, with the 10-year gilt yield at 3.55 percent. The two-year yield was at 0.88 percent.

The U.K. government plans to sell index-linked gilts due 2050 through banks this week. The Debt Management Office, which handles bond sales for the Treasury, said May 14 that HSBC Holdings Plc, JPMorgan Chase & Co., Goldman Sachs Group Inc. and UBS AG had been asked to sell the securities in a so-called syndicated transaction.

Gilts have returned about 5 percent this year, compared with gains of 6.3 percent for German government bonds and 4.4 percent for U.S. Treasuries, according to indexes compiled by Bank of America Merrill Lynch.