Pound Rises Most in Four Weeks After Retail Sales; Gilts Advance

The pound strengthened the most in four weeks against the dollar after a government report showed U.K. retail sales rose more in September than analysts forecast.

Sterling advanced versus all of its 16 major peers as the data added to signs Britain’s economy is gathering momentum. The pound also gained versus the euro. U.K. 10-year government bonds rose, with yields falling the most in more than three weeks, as investors bet disruption from the U.S. debt-ceiling debate will prompt the Federal Reserve to maintain asset purchases. The U.K. sold 4.75 billion pounds ($7.68 billion) of five-year gilts.

“There’s a lot of bullish sentiment towards the pound,” said Kathleen Brooks, European research director at Forex.com in London. “It’s being driven by a weak tone in the dollar combined with the U.K. data. We could retest the high from early October at $1.6260.”

The pound advanced 1.4 percent to $1.6168 at 4:30 p.m. London time, the biggest gain since Sept. 18. Sterling strengthened 0.4 percent to 84.55 pence per euro. It depreciated to 85.10 pence on Oct. 11, the weakest since Sept. 2.

The Bank of England may raise interest rates as soon as next year, Chief Economist Spencer Dale said in an interview with the Guardian newspaper.

“Conceivably it could be 2014,” he was reported as saying. “But it would have to be in a world where you had quite strong growth, perhaps stronger than you have got now, and a recovery in productivity weaker than I would expect.”

Sales Increase

Retail sales including fuel rose 0.6 percent from August, when they declined 0.8 percent, the Office for National Statistics said. The median forecast of 21 economists in a Bloomberg News survey was for a gain of 0.4 percent.

U.S. President Barack Obama just after midnight signed into law a measure ending the 16-day government shutdown and extending the nation’s borrowing authority until early next year. BlackRock Inc. (BLK) and Pacific Investment Management Co. said the Fed will postpone tapering bond purchases as a result of the debt-ceiling debate.

“With the dollar element now more negative, we could get another move higher” for the pound, said Derek Halpenny, European head of global-markets research at Bank of Tokyo-Mitsubishi UFJ Ltd in London. “We’re in a very short-term window without U.S. fiscal uncertainty. March is perhaps the earliest the Fed will feel comfortable about going,” he said, referring to a withdrawal of asset purchases.

Pound’s Gain

Three-month option prices show traders are becoming less bearish on the pound versus the dollar.

The premium for options granting the right to sell sterling versus those granting the right to buy narrowed to the least since January. The three-month 25-delta risk reversal was at minus 0.54 percentage point, a level not seen since Jan. 8.

Sterling appreciated 5.5 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro strengthened 4.1 percent, while the dollar weakened 1.3 percent.

The benchmark 10-year gilt yield dropped nine basis points, or 0.09 percentage point, to 2.74 percent. That’s the biggest drop since Sept. 24. The 2.25 percent bond maturing in September 2023 climbed 0.745, or 7.45 pounds per 1,000-pound face amount, to 95.745.

The Debt Management Office sold the five-year securities at an average yield of 1.583 percent, compared with 1.652 percent at the previous auction on Sept. 19. Investors bid for 1.64 times the amount on offer, versus 1.59 last month.

U.K. government bonds handed investors a loss of 3.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries dropped 2.5 percent and German securities declined 2.4 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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