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Pound Strengthens Before Fed Releases July Minutes; Gilts Slide

The pound rose to a two-month high versus the dollar before the Federal Reserve releases minutes that may provide a clue about when U.S. policy makers will remove stimulus that has helped underpin global growth.

The U.K. currency advanced against 14 of its 16 major counterparts even after a report showed Britain posted its first July budget deficit since 2010 as government spending increased. The pound erased its year-to-date decline today, according to Bloomberg Correlation-Weighted Indexes. U.K. gilts fell, pushing benchmark 10-year yields toward the highest since August 2011.

“The pound could be fairly supported ahead of the Fed minutes,” said Josh O’Byrne, a foreign-exchange strategist at Citigroup Inc. in London. “We suspect they’ll follow on from the more dovish tone set in the statement, highlighting higher mortgage rates and downside risks from low inflation.”

The pound was little changed at $1.5673 at 4:26 p.m. London time after rising to $1.5701, the highest since June 18. The U.K. currency advanced 0.5 percent to 85.22 pence per euro after appreciating to 85.05 on Aug. 15, the strongest since July 3.

The Fed will publish today its July 30-31 meeting minutes that may offer clues on whether policy makers will start reducing their $85 billion of monthly bond purchases. The Federal Open Market Committee will probably decide to reduce the program at its Sept. 17-18 meeting, according to 65 percent of economists surveyed by Bloomberg News from Aug. 9-13.

Budget Deficit

U.K. net borrowing excluding temporary support for banks was 488 million pounds compared with a surplus of 823 million pounds a year earlier, the Office for National Statistics said. Including coupon cash received from the Bank of England on its holdings of gilts, the deficit was 62 million pounds.

The pound also rose as the Confederation of British Industry said its measure of new orders at U.K. factories rose to the highest in two years in August and expectations for the next three months improved.

The CBI’s manufacturing gauge advanced to zero from minus 12 in July, it said in London today. A measure of output expectations rose to 25 from 15, the highest since March 2011.

The pound has gained 0.7 percent this year after earlier dropping as much as 6.9 percent, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The euro climbed 6.3 percent, while the dollar strengthened 4.8 percent.

Economy Strengthening

The U.K. economy is showing signs of strengthening, with indexes of manufacturing, services and construction all improving in July and house prices rising amid the strongest property market since the financial crisis.

Gross domestic product increased 0.6 percent in the second quarter, according to the median forecast of 34 analysts in a Bloomberg News survey before the Office for National Statistics publishes the data on Friday. That’s in line with an earlier reading released on July 25.

“The pound’s strength is justified by the better economic data,” said Stuart Bennett, the head of Group-of-10 foreign-exchange strategy at Banco Santander SA in London. “The pound was fairly valued given the economic backdrop, giving it some scope to rise.”

The 10-year gilt yield rose four basis points, or 0.04 percentage point, to 2.71 percent after climbing to 2.75 percent on Aug. 19, the highest since Aug. 8, 2011. The 1.75 percent bond due in September 2022 fell 0.28, or 2.80 pounds per 1,000-pound face amount, to 92.33.

Gilts lost investors 4.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 2.1 percent and Treasuries declined 3.5 percent.

To contact the reporter on this story: Morgane Lapeyre in London at mlapeyre@bloomberg.net

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

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