Pound Approaches 3-Month High After Factory Data; Gilts Decline

The pound rose toward a three-month high against the dollar after an industry report showed U.K. manufacturing shrank less than economists forecast, damping speculation the Bank of England will increase monetary stimulus.

The U.K. currency gained versus most of its major counterparts after Markit Economics and the Chartered Institute of Purchasing and Supply said producers of consumer goods increased output last month and a “severe decline” in new orders caused by Europe’s debt turmoil eased. U.K. government bonds fell before the Bank of England meets to review interest rates and asset purchases this week.

“The pound has rallied at the margin following this morning’s manufacturing data,” said Michael Derks, chief strategist at FXPro Group Ltd. in London. “Recently, there have been some slightly better numbers coming from the U.K. but at best the economy is going sideways.”

The pound gained 0.1 percent to $1.5888 at 4:54 p.m. London time after rising to $1.5912 on Aug. 23, the strongest level since May 17. Sterling was little changed at 79.29 pence per euro after rising as much as 0.3 percent.

An index of U.K. factory output rose to 49.5 in August from a revised 45.2 in July, Markit said in London. The median forecast of economists surveyed by Bloomberg News was for an increase to 46.1. A reading below 50 indicates contraction. Markit will release its survey of the U.K. services sector on Sept. 5.

‘Bolster Expectations’

“It will be interesting to see if the rebound in manufacturing is also reflected in the services index,” David Tinsley, chief U.K. economist at BNP Paribas in London, wrote in a note. “That would help bolster expectations that the economy will return to growth in the second half of this year.”

The pound faces so-called resistance at its Aug. 23 high of $1.5912, according to Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. Resistance refers to an area where sell orders may be clustered.

The pound has gained 1.5 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar weakened 0.9 percent, and the euro declined 4 percent.

Speculation the Federal Reserve will add further monetary stimulus to support growth in the world’s largest economy has weighed on the dollar and boosted the pound.

“The dollar is on the defensive because it appears the Fed is on the cusp of implementing more quantitative easing,” FXPro’s Derks said.

U.S. policy makers next meet on Sept. 12-13.

Gilts Decline

The 10-year gilt yield climbed two basis points, or 0.02 percentage point, to 1.65 percent. The 1.75 percent bond due in September 2022 fell 0.2, or 2 pounds per 1,000-pound face amount, to 100.915.

Gilts returned 4.2 percent this year through Aug. 31, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4 percent and U.S. Treasuries rose 2.7 percent.

The Bank of England will keep its key interest rate at a record low 0.5 percent and hold its asset purchase target at 375 billion pounds at its monthly policy announcement on Sept. 6, according to Bloomberg surveys of economists.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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