Pound Strengthens as Manufacturing Beats Forecast; Gilts Slide

The pound rose for a fourth day against the euro as a gauge of U.K. manufacturing climbed in November at a faster pace than economists forecast.

Sterling reached the strongest since August 2011 versus the dollar after separate data showed British house prices increased in all regions last month for the first time in more than six years. U.K. government bonds fell for a second day as demand for fixed-income assets waned. The Bank of England said last month that officials may consider raising interest rates sooner than previously forecast as the recovery gains pace.

“The markets will continue to romance the idea that the Bank of England will ultimately have to raise interest rates earlier than is currently expected,” said Paul Robson, a currency strategist at Royal Bank of Scotland Group Plc in London. “The U.K. recovery does seem to be leading many other developed nations and that translates into a favorable move in interest-rate spreads and that is something that tends to support the currency.”

The pound advanced 0.3 percent to 82.79 pence per euro at 4:33 p.m. London time after appreciating to 82.53 pence, the strongest level since Jan. 11. The U.K. currency was little changed at $1.6366 after rising to $1.6443, the highest since August 2011.

Best Performer

Sterling has gained 7.4 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 3.6 percent, while the dollar weakened 1.1 percent.

An index of U.K. manufacturing based on a survey of purchasing managers climbed to 58.4 from a revised 56.5 in October, Markit Economists said in London. That exceeded the median estimate of 56.1 in a Bloomberg survey of economists. Home values across England and Wales increased 0.5 percent from October, property researcher Hometrack said.

“The report reinforces the recent strong buy momentum for the pound,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, referring to the manufacturing data. “The report is consistent with the robust pace of economic recovery continuing in the final quarter of this year. That’s a supportive factor for the pound with the U.K. economy outperforming the other major economies.”

The 10-year gilt yield climbed seven basis points, or 0.07 percentage point, to 2.84 percent after rising to 2.87 percent on Nov. 21, the highest level since Sept. 24. The 2.25 percent bond maturing in September 2023 fell 0.605, or 6.05 pounds per 1,000-pound face amount, to 94.98.

Largest Premium

Britain’s economy grew faster than those of other Group of Seven nations in the third quarter, expanding 0.8 percent, up from 0.7 percent in the previous three months.

As U.K. and European economies diverge, investors are demanding the largest premium to hold U.K. bonds over their French equivalents in more than three years. Ten-year gilts yield 67 basis points more than similar-maturity French bonds, the most since May 2010 based on closing prices.

The Bank of England said in its quarterly Inflation Report on Nov. 13 the jobless rate is more likely than not to fall to the 7 percent threshold that will lead it to consider raising interest rates in the third quarter of 2015. It previously predicted that would only happen in 2016.

U.K. government securities handed investors a loss of 3.2 percent this year through Nov. 29, according to Bloomberg World Bond Indexes. German bonds fell 1 percent and U.S. Treasuries declined 2.3 percent.

To contact the reporters on this story: Eshe Nelson in London at enelson32@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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

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