The pound rose against the euro, following three weeks of losses, before a government report this week that economists said will show the U.K. avoided falling into a triple-dip recession last quarter.
Sterling advanced versus all except one of its 16 major counterparts as a person familiar with the plan said Chancellor of the Exchequer George Osborne will unveil the second phase of a strategy to boost loans for small companies and consumers. Gilts gained even after Fitch Ratings cut Britain’s credit rating last week. The Office for National Statistics will release its report on gross domestic product on Friday.
“Sterling sold off last week as a lot of bad news has been priced in and now it seems to be stabilizing into the GDP data,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The market consensus is for flat growth and not a triple-dip recession. Longer-term, we still expect the pound weakness to continue.”
The pound gained 0.2 percent to 85.49 pence per euro at 4:40 p.m. in London after declining 1.5 percent during the previous three weeks. Sterling rose 0.2 percent to $1.5263 after falling to $1.5204, the weakest level since April 5.
Osborne may extend the Bank of England’s Funding for Lending Scheme as soon as this week, said the person, who declined to be identified because the measure hasn’t been officially announced. The International Monetary Fund, whose delegation will visit London next month for an audit of the U.K., has called on him to do more to aid the economy.
Sterling has declined 3.8 percent this year, the second- worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 3.2 percent and the euro rose 1.9 percent.
Futures traders pared bets the pound will fall against the dollar, figures from the Commodity Futures Trading Commission showed. The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain -- so-called net shorts -- was 61,975 on April 16, compared with net shorts of 69,969 a week earlier.
The 10-year gilt yield fell one basis point, or 0.01 percentage point, to 1.65 percent after falling to 1.64 percent, the lowest level since April 8. The 1.75 percent bond due in September 2022 rose 0.11, or 1.10 pounds per 1,000-pound face amount, to 100.87.
Fitch reduced the U.K.’s credit rating to AA+ from AAA on April 19, citing a weaker economic and fiscal outlook as it became the second company to cut the country’s ranking within the past two months.
“Fitch’s downgrade is hardly a significant event for the gilt market,” said Anders Vestergaard Fischer, a fixed-income analyst at Danske Bank A/S in Copenhagen. “The growth outlook remains weak in the U.K. and the Bank of England may boost stimulus by expanding its bond-buying program. Gilts are likely to remain in a low-yield environment.”
U.K. money markets are indicating Bank of England policy makers will expand their bond-buying target, currently 375 billion pounds, by 80 billion pounds, according to JPMorgan Chase & Co.
JPMorgan based its calculation on indications of future borrowing costs known as the sterling overnight index average, or sonia. The contract for March 2014 was at 0.257 percent, below the benchmark interest rate of 0.5 percent.
“There’s a need for the Bank of England to do something given the weak backdrop from the euro area and what we see in the U.K., where the economy isn’t significantly recovering,” said Francis Diamond, a fixed-income strategist at JPMorgan in London. “Our in-house model suggests the current level implies around 80 billion pounds of additional QE,” he said, referring to quantitative easing.
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