GBP strengthens on ECB rate cuts

June 5, 2014 06:44 AM

U.K. stocks erased their advance as the pound (CME:B6M14) strengthened after European Central Bank President Mario Draghi announced new long-term refinancing operations after lowering interest and deposit rates for the euro (CME:E6M14) area.

Smith & Nephew Plc gained 4.4% after people familiar with the matter said Medtronic Inc. is preparing an offer for the maker of medical implants. Asos Plc sank 31%, prompting a rout of online retailers, after the clothing company cut its annual-profitability forecast.

The FTSE 100 Index dropped 10.84 points, or 0.2%, to 6,807.79 at 3:02 p.m. in London, after earlier climbing as much as 0.4%. The benchmark has rallied 5.6% from this year’s low on February 4 as mergers-and-acquisitions activity increased and as ECB President Mario Draghi said policy makers were comfortable with taking action at the June meeting. The broader FTSE All-Share Index also slipped 0.1%, while Ireland’s ISEQ Index gained 0.4% today.

“Investors are not selling off U.K. equities, they’re just buying euro-zone stocks more,” Stewart Richardson, who helps oversee about $100 million as chief investment officer at RMG Wealth Management LLP in London, said by phone. “With the move into negative rates, there’s even more desire for yields in euro-zone assets. The ECB is clearly dangling the carrot of quantitative easing in front of markets. The rationale is clearly to weaken the euro.”

Strengthening Pound

The pound advanced to its highest level against the euro since December 2012 as Draghi said the ECB will conduct a series of LTROs, which will mature in September 2018. The initial size of its refinancing operation will be €400 billion ($543 billion), he said at a press conference in Frankfurt following the central bank’s meeting. Draghi also said the ECB would consider buying asset-backed securities.

The central bank’s Governing Council earlier decided to lower the euro area’s benchmark interest rate to 0.15% from 0.25%. The central bank also cut the deposit rate to minus 0.1% from zero, taking it negative for the first time. That matched the median forecast of economists.

The Bank of England left its key interest rate at a record low of 0.5% and held its asset-purchase target at £375 billion ($629 billion), matching the predictions of economists surveyed by Bloomberg News. Better-than-forecast data from house prices to manufacturing has fueled speculation that members of the Monetary Policy Committee will begin debating higher interest rates.

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