The pound advanced for a second week versus the dollar after an industry group predicted U.K. house prices will accelerate next year and a Bank of England official said the economy will improve.
Sterling appreciated against most of its 16 major counterparts as investors said Standard & Poor’s decision yesterday to lower the U.K.’s credit-rating outlook will have little impact. Ten-year gilts held a five-day slide as European Union leaders pledged to seek a joint strategy for handling failing banks, damping demand for safer investments.
“The global economic outlook has improved and my view is that the pound will benefit from that and it might be more resilient than many thought,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. “Any setback from the S&P’s decision is likely to be short-lived because all it did was confirm what the market already knew.”
The pound was little changed at $1.6135 as of 4:45 p.m. London time after rising to $1.6172 on Dec. 12, the strongest since Nov. 1. It has gained 0.6 percent this week. The U.K. currency fell 0.3 percent to 81.39 pence per euro after sliding a similar amount yesterday following S&P’s announcement.
Bank of England Markets Director Paul Fisher told Reuters yesterday the U.K. economy will pick up slowly during next year and the deflation risk has subsided, reducing the need to “do asset purchases in large scale.”
U.K. home values will increase 2 percent in 2013 after a 1 percent gain this year, the Royal Institution of Chartered Surveyors said in a report. Still, the recovery will be “modest” because of the difficult economic environment, it said. A separate report from Acadametrics showed prices rose 0.2 percent in November.
U.K. jobless claims unexpectedly declined in November, the Office for National Statistics said Dec. 12, while the Confederation of British Industry said yesterday its gauge of manufacturing orders improved in December.
The pound has gained 1.2 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 1.5 percent and the dollar fell 3 percent.
Investors should sell the pound versus the dollar because the U.K. status as a haven will be threatened by its fiscal and current-account deficits, according to Royal Bank of Scotland Group Plc.
The bank recommends investors target a depreciation of about 7 percent to $1.5050, Paul Robson, a senior currency strategist in London, wrote in a client note today. He recommended exiting the position should the U.K. currency climb to $1.6640.
S&P lowered its outlook on Britain’s AAA grade to negative from stable, meaning there is one-in-three chance it may cut the rating in the next two years, the agency said in a statement in London. This may happen if the U.K. economic and fiscal performance “weaken beyond our current expectations,” the rating company said.
“We don’t see it as significant” for gilts, said Stuart Thomson, who helps oversee about $120 billion as a fund manager at Ignis Asset Management in Glasgow, Scotland. “A move from AAA to AA+ has lost its impact, if it ever had any. The impact on default is virtually meaningless.”
Chancellor of the Exchequer George Osborne played down the importance of Britain’s top credit rating, saying it is only one gauge of the economy’s health. Speaking to Parliament’s Treasury Committee hours before S&P’s announcement, he said the rating is “one test alongside others and the ultimate test is what you can borrow money at.”
EU finance ministers meeting overnight in Brussels agreed to put the European Central Bank in charge of all euro-area lenders in a deal that paves the way for the currency bloc’s firewall fund to provide direct bailouts to banks.
The 10-year gilt yield was little changed at 1.86 percent. The 1.75 percent bond due September 2022 declined 0.02, or 20 pence per 1,000-pound face amount, to 99. The yield has increased 12 basis points this week, the most since the period ended Oct. 19.
U.K. bonds have handed investors a loss of 0.9 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds rose 0.3 percent and Treasuries declined 0.5 percent.