OREANDA-NEWS. February 18, 2015. Sterling fell almost half a percent against the euro on Tuesday, as an afternoon recovery and some signs of greater optimism around the UK economy failed to offset a robust performance by the euro.

After a rough morning, the pound and the dollar recovered some ground as both Treasury and gilt yields extended their advantage over their euro zone equivalents.

British 10-year government bond yields rose as much as 11 basis points on the day to peak at 1.772 percent, and the spread of 10-year gilts over Bunds hit a three-month high of 139.8 basis points.

But on the day, sterling was still 0.5 percent lower against the euro at 74.27 pence. It was broadly unchanged at \\$1.5345.

"Overall we remain constructive on the UK outlook," analysts from Citigroup said in an afternoon note. "But the long sterling positions in the market are likely to be unwound ahead of the elections (in May)," they said, recommending clients take profit on any short euro positions.

In trade-weighted terms, the pound is close to a seven-year high against a basket of currencies. Yields on 20- and 30-year bonds also rose to 2.330 percent and 2.506 percent respectively

The pound, like shorter-dated gilts, should draw strength from the growing divergence expected in the monetary policy of the Bank of England and its Japanese and euro zone counterparts.

"The market sentiment is changing in favour of sterling," said Manuel Oliveri, a currency strategist at Credit Agricole in London.

"We think the market has been very much focused on signs of a bounce in the economy. With positioning showing that the market is still short of sterling, there is room for more gains."

Inflation's latest decline, to its lowest level since records began in 1989, eases a squeeze on consumers before Britain's May election and gives the Bank of England more room to hold off from a demand-cooling rise in interest rates.