Pound Rises From Near 4-Week Low on Growth Bets; SocGen Says Buy

The pound strengthened from near a four-week low against the dollar before reports this week that economists said will add to signs Britain’s growth is gaining momentum, boosting demand for the currency.

Sterling rose the most in a week versus the greenback as talks on raising the U.S. debt ceiling hit an impasse before the government’s borrowing authority lapses on Oct. 17. Investors should buy the pound and sell U.K. government bonds as the economy recovers, Societe Generale SA said. The U.K. jobless rate was 7.7 percent in the quarter through August, matching the lowest level since 2009, according to a Bloomberg News survey before the report is released on Wednesday.

“Unemployment is the most important piece of U.K. data this week,” said Steve Barrow, head of Group-of-10 research at Standard Bank Plc in London. “We could easily see the rate falling to 7.6 percent. The risk-reward is to be long of sterling into that data,” he said, referring to a bet the currency will strengthen.

The pound rose 0.3 percent to $1.5999 at 4:24 p.m. London time after sliding to $1.5914 pence on Oct. 10, the lowest level since Sept. 18. Today’s gain is the biggest since Oct. 7. The U.K. currency was little changed at 84.86 pence per euro.

The premium for options granting the right to sell sterling in three months, versus those granting the right to buy, narrowed to the least since January. The three-month 25-delta risk reversal was at minus 0.63 percentage point after reaching minus 0.61, a level not seen since Jan. 16.

Unemployment Rate

The unemployment data, as measured by International Labour Organization methods, will match the reading from Sept. 11, when it unexpectedly dropped to 7.7 percent, analysts said. The rate hasn’t been lower since the three months through May 2009. The Bank of England’s Monetary Policy Committee has said officials would reassess their policy stance if it falls to 7 percent. Other reports this week may show retail sales increased in September and home prices rose in August.

The pound appreciated 2.9 percent in the past three months, the best performer after New Zealand’s dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes amid signs U.K. growth is gaining momentum. The euro strengthened 0.8 percent, while the U.S. dollar weakened 3.5 percent.

U.S. Deadlock

U.S. Republicans and Democrats were still in talks to resolve a fiscal stalemate and reopen the government before it exhausts its $16.7 trillion borrowing authority. Senate Majority Leader Harry Reid said he would negotiate further with Minority Leader Mitch McConnell after a phone call between the two failed to produce a breakthrough.

The 10-year gilt yield was little changed at 2.74 percent after falling to 2.65 percent on Oct. 9, the lowest level since Aug. 27. The price of the 2.25 percent bond due in September 2023 was 95.745.

Yields on U.K. government debt are set to rise quicker than their U.S. or euro-area equivalents as Britain’s economy recovers and amid rising inflation expectations, according to Kit Juckes, a global strategist at Societe Generale in London, wrote in a note to clients.

“That will put pressure on the MPC, which will be reflected in markets pricing in faster/more rate hikes, demanding a bigger risk premium to hold gilts, while also boosting sterling,” Juckes wrote.

Home prices increased 3.4 percent in August from a year earlier, after climbing 3.3 percent the previous month, according to a separate Bloomberg survey of economists before the data is released tomorrow. A report on Thursday will show retail sales excluding fuel rose 0.3 percent last month, after sliding 1 percent in August, the economists predict.

U.K. gilts handed investors a loss of 3.2 percent this year through Oct. 11, according to Bloomberg World Bond Indexes. Treasuries fell 2.6 percent and German bunds dropped 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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