Pound Strengthens as BOE Keeps Stimulus on Hold

The pound has its first weekly advance against the dollar in more than a month and U.K. government bonds fell after the Bank of England kept its stimulus program and benchmark interest rate unchanged.

Britain’s currency climbed from the lowest level in almost five months against the yen after a report showed U.K. services grew more than analysts estimated in May. While the decision to refrain from expanding the bond-buying plan was predicted by 37 of 42 economists surveyed by Bloomberg News, Citigroup Inc. and Deutsche Bank AG were among those that forecast an expansion.

“The Bank of England took a pause this week,” which supported sterling, said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The market is looking for further easing ahead, so it’s a pause for the pound, not a change. We anticipate the BOE will have to add more and that will weaken the pound.”

The pound advanced 0.4 percent to $1.5423 at 4:20 p.m. London time yesterday, climbing for the first week since the five days through April 27. It reached $1.5601 on June 7, the strongest level since May 30. Sterling rose 2.3 percent to 122.65 yen, after reaching 118.81 yen on June 1, the weakest level since Jan. 19. The pound was little changed at 80.89 pence per euro.

Sterling may fall to less than $1.50 in the next couple of months, Hardman said. It last traded at that level in July 2010, data compiled by Bloomberg shows.

Gilt Yield

Policy makers held the bond-purchase program at 325 billion pounds and kept their benchmark rate at a record-low 0.5 percent on June 7. Minutes of the meeting, showing how officials voted, will be published on June 20.

The 10-year gilt yield rose 10 basis points, or 0.1 percentage point, to 1.64 percent. The yield reached a record- low 1.439 percent on June 1.

The U.K. services gauge based on a survey of purchasing managers held at 53.3, the same reading as the previous month, Markit Economics and the Chartered Institute of Purchasing and Supply said on June 7. Economists surveyed by Bloomberg News had forecast a decline to 52.4. A reading above 50 indicates expansion.

Sterling has gained 1.6 percent this year, the second-best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, after the dollar, as investors sought U.K. assets as a haven from Europe’s debt crisis. The U.S. currency rose 2.4 percent, and the euro dropped 1.8 percent.

Economists say data next week will add to evidence the U.K. economy is faltering. Factory output fell 0.1 percent in April, after rising 0.9 percent in March, according to a Bloomberg survey before the government report on June 12.

Gilts have returned 2.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds rose 3.5 percent, and U.S. Treasuries gained 1.7 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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