Pound Approaches Two-Year High as Construction Grows; Gilts Rise

The pound strengthened toward a two-year high against the dollar after U.K. construction activity expanded at its fastest pace in more than six years in November amid a revival in the housing market.

Sterling advanced for the fifth time in six days versus the U.S. currency amid speculation the Bank of England is moving closer to raising interest rates as the recovery gains momentum. The central bank, which meets this week, said in its quarterly Inflation Report last month it may boost borrowing costs in the third quarter of 2015 instead of the second quarter of 2016. U.K. government bonds rose with Treasuries and German bunds.

“It’s very positive for sterling,” said Neil Jones, head of European hedge-fund sales at Mizuho Bank Ltd. in London, referring to the construction data. “It’s quite likely that the first central bank in a major nation to raise interest rates will be the U.K. and the market’s beginning to warm to that idea. The days of easy money are over.”

The pound rose 0.3 percent to $1.6409 at 4:30 p.m. London time after advancing to $1.6443 yesterday, the highest level since August 2011. The U.K. currency was little changed at 82.83 pence per euro. It appreciated to 82.53 pence yesterday, the strongest since Jan. 11.

An index of construction climbed to 62.6 from 59.4 in October, Markit Economics said in London. The median forecast of economists surveyed by Bloomberg was 59. The gauge has been above the 50 level that divides expansion from contraction since May. Like-for-like retail sales grew at a slower pace last month, the British Retail Consortium said in a separate report.

Pound’s Advance

The pound has appreciated 3.9 percent in the past month, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 1.3 percent and the dollar gained 0.5 percent.

Sterling’s advance versus the dollar is unlikely to continue, David Bloom, global head of currency strategy at HSBC Holdings Plc in London, said on Bloomberg Television’s “Countdown” with Mark Barton. “It’s hard to believe the U.K. is self-sustaining momentum unless we have companies investing, productivity picking up. That hasn’t happened.”

The central bank said it discussed expanding its powers to control loan-to-value ratios on mortgages as a way of tackling financial risks, according to minutes of the Financial Policy Committee’s Nov. 20 meeting published today.

Higher Rates

The minutes and central-bank measures to quell the housing market “reinforces the notion that the next move in U.K. rates -- even if it’s one year from now -- is going to be higher, not lower,” said Kiran Kowshik, a currency strategist at BNP Paribas SA in London. “There’s nothing to suggest that things are going to slow down right now, which is why you want to be positive sterling.”

Options traders are the most bullish on the pound against the euro in 15 months, suggesting the U.K. currency will extend recent gains, 25-delta risk reversals show.

The premium traders pay for options to buy sterling against the common currency on a three-month basis versus those allowing for sales, increased to as much as 57 basis points, the most since Aug. 13, 2012.

The yield on the benchmark 10-year gilt four two basis points, or 0.04 percentage point, to 2.81 percent after rising to 2.87 percent on Nov. 21, the highest since Sept. 24. The 2.25 percent bonds due in September 2023 gained 0.3, or 3 pounds per 1,000-pound face amount, to 95.235.

Gilts lost 3.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds fell 1.2 percent and U.S. Treasuries declined 2.5 percent.

To contact the reporter on this story: Eshe Nelson in London at enelson32@bloomberg.net

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

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