Pound Rises Amid Bets U.K. Economy Exited Recession; Gilts Fall

The pound strengthened the most in more than three months against the euro on optimism the U.K. economy pulled out of recession in the third quarter, boosting demand for British assets.

Britain’s currency rose against all but two of its 16 major counterparts even after a report showed the nation’s manufacturing industry unexpectedly slumped in October. Gross domestic product expanded 0.6 percent last quarter from the previous three months, according to a Bloomberg survey of economists before the data tomorrow. Bank of England Governor Mervyn King said yesterday the data may confirm a “zig-zag” pattern of recovery in the U.K. Gilts fell.

“The focus for the pound is on the GDP release tomorrow,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “The pound is looking a little bit vulnerable at these levels. It wouldn’t surprise me if GDP came out below consensus and then the pound could fall.”

Sterling gained 0.7 percent to 80.89 pence per euro at 4:23 p.m. London time, posting the steepest intraday advance since July 5, after reaching 81.65 pence on Oct. 22, the weakest since June 11. Sterling rose 0.4 percent to $1.6023.

The FTSE 100 Index of British shares climbed for the first time in four days, adding 0.1 percent.

The pound’s strength against the euro is “expected to be short-lived,” technical analysts at Credit Suisse Group AG, including David Sneddon, wrote in an e-mailed note today. Investors should sell the pound against the euro, they recommended, targeting a depreciation to 82.63 pence, the weakest level since April.

CBI Gauge

The Confederation of British Industry’s gauge of factory orders dropped to minus 23 from minus 8 in September, data showed today. The median of 11 analyst forecasts in a Bloomberg News survey was for an increase to minus 6.

Sterling extended its advance against the euro as data revealed euro-region output contracted in October, boosting demand for alternatives to the euro.

A composite index based on a survey of purchasing managers in manufacturing and services fell to 45.8 from 46.1 in September, London-based Markit Economics said today. Economists surveyed by Bloomberg forecast a reading of 46.5. A number below 50 indicates contraction.

Sterling declined 0.6 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 3.9 percent and the dollar dropped 4.1 percent.

BOE Meeting

Central bank officials meet in two weeks to decide whether to increase their so-called quantitative easing, or QE, program to boost the economy. Policy makers kept the target at 375 billion pounds at this month’s meeting.

“At this stage, it is difficult to know whether some of the recent more positive signs will persist,” King said in a speech late yesterday in Cardiff, Wales. “Should those signs fade, the Monetary Policy Committee does stand ready to inject more money into the economy.”

Nomura International Plc economist Philip Rush increased his forecast for additional bond purchases, predicting the Bank of England will expand QE by 50 billion pounds in February.

The 10-year gilt yield rose three basis points, or 0.03 percentage point, to 1.86 percent. The 1.75 percent bond due in September 2022 fell 0.28, or 2.80 pounds per 1,000-pound face amount, to 99.04.

Gilts have returned 2.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 2.5 percent and Treasuries earned 1.8 percent.

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

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

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