By Matthew Brown
Jan. 7 (Bloomberg) — The U.K. pound rose, breaching 90 pence per euro for the first time in three weeks, on bets the European Central Bank will step up the pace of interest-rate cuts as the region using the single currency slides deeper into a recession.

The pound gained versus the dollar for a third day and the Japanese yen for a sixth, and was higher against all 16 of the world’s most actively traded currencies. German unemployment rose for the first time in almost three years and European factory-gate prices plunged the most since 1981, boosting the case for the ECB to lower borrowing costs next week. The pound strengthened more than 6 percent against the euro in the past three days.

“There’s a number of warning signals coming from Europe, suggesting that the euro is going to come under sustained pressure over the coming weeks and months,” said Ian Stannard, a foreign- exchange strategist at BNP Paribas SA in London. “The market has not fully priced in the negative news we’re likely to get from Europe, while in the U.K. the market has fully taken on board the extent of the slowdown and the implications of that.”

The pound strengthened as much as 1.3 percent to 89.61 pence per euro and was trading at 89.98 pence as of 5:17 p.m. in London. It gained 2.1 percent to $1.5227, the first time it has breached $1.50 since Dec. 19.

The pound slid 23 percent against the euro last year, its biggest annual drop since the common currency’s debut, as U.K. policy makers cut rates by more than the ECB and the British economy entered its first recession in 17 years.

‘Clear Overshoot’

Joblessness in Europe’s largest economy rose by 18,000 in December as the economic slump prompted companies to cut workers, the Nuremberg-based Federal Labor Agency said today. European producer prices, an early indicator of price pressures in an economy, fell the most in 27 years, a separate report showed.

Investors should avoid betting on the pound reaching parity with the euro, according to UBS AG. “Any chase for parity in euro-pound is a clear overshot and offers limited risk-reward,” Ashley Davies, a currency strategist in Singapore at UBS, wrote in a report today.

The pound will end the first quarter at 90 pence per euro and finish the year 84 pence, BNP Paribas predicts.

“The broad macro-economic backdrop remains sterling negative, meaning that euro-sterling will probably remain elevated during 2009 after stabilizing around 90 pence or so,” said David Powell, a currency strategist at Bank of America Corp. in London.

Euro-sterling is supported at 89.90 pence per euro, as this would represent a 38.2 percent retracement of the euro’s rally against the pound from Oct. 6 to Dec. 30, according to analysis of Fibonacci numbers, Powell said.

Gilt Auction

U.K. government bonds rose, pushing the yield on the two-year gilt down three basis points to 1.79 percent. The 4.25 percent security due March 2011 added 0.06, or 60 pence per 1,000-pound face amount, to 105.19. The 10-year gilt yield gained three basis points to 3.29 percent.

The Debt Management Office, which oversees auctions of gilts for the Treasury, today sold 2 billion pounds of 4.75 percent bonds due 2038.

The U.K. said it plans an unprecedented 146.4 billion pounds of debt sales in the fiscal year ending March 31 as Prime Minister Gordon Brown’s government seeks to finance bank bailouts and revive the shrinking economy amid a decline in tax revenue.

Demand for gilts at future sales may wane, according to Nomura International Plc.

“The 30-year gilt auction met with a strong response,” Charles Diebel, head of European interest-rate strategy in London at Nomura, said in an e-mailed note today. “While the merits of this issue were clear, we have 10-year supply next week and with 51 billion pounds to get away in the first quarter, we are not convinced that consequent issues will fare as well.”

To contact the reporter on this story: Matthew Brown in London atmbrown42@bloomberg.net

Last Updated: January 7, 2009 12:42 EST

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