Pound Strengthens to 4-Month High After Trade Deficit Shrinks

The pound rose to the strongest level in almost four months versus the dollar after a report showed the U.K. trade deficit shrank in July as exports soared, adding to signs the economy is emerging from recession.

Sterling advanced for the fourth time in five days before a labor market report tomorrow forecast to show the unemployment rate stayed at the lowest in over a year. The pound also gained as a Bank of England policy maker said the U.K. economy may be stronger than growth data indicate. Ten-year gilts were little changed after a sale of inflation-linked bonds.

“The trade numbers are surprisingly encouraging which has important implications for economic growth,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “The pound may now have some more room to rally against the dollar.”

Sterling gained 0.5 percent to $1.6067 as of 4:19 p.m. London time, after rising to $1.6079, the strongest since May 15. The pound depreciated 0.2 percent to 79.97 pence per euro, after touching 80.11 pence yesterday, the weakest level since July 5.

The U.K. shortfall narrowed to 7.2 billion pounds from 10.1 billion pounds in June. The median forecast of 20 analysts in a Bloomberg News survey was 9 billion pounds. Exports rose 9.3 percent, the biggest increase since January 2003, while imports fell 2.1 percent.

‘More Momentum’

Britain is struggling to emerge from a double-dip recession as the debt crisis continues in the euro area, its biggest trading partner. The Bank of England held its target for bond purchases at 375 billion pounds last week as policy makers assessed the impact of their Funding for Lending program to boost the flow of credit in the economy.

“Some of the other data do suggest there’s a little bit more momentum in the economy” than the gross domestic product data suggest, Ian McCafferty, a member of the Bank of England’s Monetary Policy Committee, told lawmakers in London today.

Chancellor of the Exchequer George Osborne, speaking in the House of Commons today, said the Autumn Statement, in which the government updates its growth and fiscal forecasts, will be published on Dec. 5.

Technical Analysis

The pound faces so-called resistance at $1.6081, the 78.6 percent Fibonacci retracement of the decline from April 30 to June 1, Axel Rudolph, a senior technical analyst at Commerzbank AG in London, wrote in an e-mailed note.

Resistance refers to an area on a price graph where analysts anticipate orders to sell a security. Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low.

The pound has gained 0.6 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar fell 2 percent and the euro rose 3 percent.

The Debt Management Office sold 1.25 billion pounds of inflation-linked bonds due in 2034 at a so-called real yield of 0.126 percent. The U.K. last sold the securities on May 3 at a real yield of 0.05 percent. The Debt Office will auction 3.5 billion pounds of benchmark 10-year securities on Sept 13.

The yield on 10-year gilts rose less than one basis point, or 0.01 percentage point, to 1.74 percent. The 1.75 percent bond maturing in September 2022 fell 0.045, or 45 pence per 1,000- pound face amount, to 100.115.

Gilts have returned 3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, outperforming German bunds, which gained 2.6 percent, and U.S. Treasuries, which earned 2.2 percent.

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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