Pound advances to highest this month against euro

June 26 (Bloomberg) -- The pound climbed to the strongest this month against the euro amid speculation European Union leaders meeting this week will fail to agree on measures to stop the region’s debt crisis from spreading.

Sterling advanced for a second day versus the single currency as Italian and Spanish borrowing costs surged at debt auctions, boosting demand for the pound as a haven. Gilts fell after a government report showed Britain had a larger budget deficit in May than economists forecast. The U.K. sold 1.25 billion pounds ($1.96 billion) of inflation-linked debt.

“We have the EU summit, which I think is most likely to be taken by the market in a disappointing fashion,” said Steven Barrow, head of Group-of-10 research at Standard Bank Plc in London. “Euro-sterling is going to go down,” he said, meaning the pound will strengthen versus the 17-nation single currency.

Sterling appreciated 0.4 percent to 80 pence per euro at 2:30 p.m. London time after reaching 79.85 pence, the strongest since May 30. The pound gained 0.2 percent to $1.5597. It fell to $1.5539 yesterday, the weakest since June 15.

EU leaders gather in Brussels for two days of talks starting June 28, the 19th meeting since the debt crisis broke out in early 2010. Spain sold three-month bills at a yield of 2.36 percent today, up from 0.85 percent at the previous auction. Italy sold zero-coupon debt due in 2014 at a yield of 4.71 percent, compared with 4.04 percent on May 28.

Second Best

The pound has appreciated 1.9 percent this year, according to Bloomberg Correlation-Weighted Indexes, as investors sought safety from Europe’s debt turmoil. Only New Zealand’s dollar rose more among the 10 developed-market currencies. The euro dropped 2.7 percent.

Sterling’s advance against the dollar may be capped by resistance at the 200-day moving average, currently at $1.5749, according to data compiled by Bloomberg. Resistance refers to an area where sell orders may be clustered.

The yield on the 10-year gilt rose the most in a week after the Office for National Statistics said the budget shortfall excluding government support for banks was 17.9 billion pounds in May. Economists forecast a deficit of 14.8 billion pounds, according to a Bloomberg survey.

The 10-year gilt yield rose four basis points, or 0.04 percentage point, to 1.71 percent, after climbing as much as six basis points, the most since June 19. The 4 percent bond due in March 2022 fell 0.35, or 3.50 pounds per 1,000-pound face amount, to 120.41.

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