The pound snapped two days of declines against the euro after U.K. retail sales rose more than analysts forecast in September, adding to signs that the economy is recovering from a recession.
Sterling pared a drop versus the dollar as the sales data followed figures yesterday showing jobless claims unexpectedly slid last month and payrolls increased. Gilts were little changed as the Debt Management Office sold 3.75 billion pounds ($6.05 billion) of seven-year securities.
“The data shows there might be a bit more momentum behind the economy and people are looking for evidence that the U.K. is coming out of recession,” said Simon Smith, chief economist at FXPro Group Ltd. in London. “The labor-market data yesterday showed employment rising and that was taken as a positive for the pound.”
The pound strengthened 0.1 percent to 81.18 pence per euro at 4:33 p.m. London time after weakening 0.8 percent over the previous two days. The U.K. currency was little changed at $1.6135 after falling as much as 0.2 percent before the data.
Retail sales including fuel gained 0.6 percent from August, when they fell 0.1 percent, the Office for National Statistics said. The median forecast of 24 economists in a Bloomberg News survey was for a 0.4 percent gain. Jobless-benefit claims dropped 4,000 to 1.57 million in September, the statistics office said yesterday.
The pound “registered small gains on stronger retail sales,” Elsa Lignos, a senior currency strategist at Royal Bank of Canada in London, wrote in a note to clients. “Our economists point out these are volatile data.”
Britain’s economy will shrink 0.3 percent this year, according to a Bloomberg survey. That compares with predictions for 2.1 percent growth in the U.S. and a 0.5 percent contraction in the euro area. The government will release U.K. gross domestic product data for the third quarter on Oct. 25.
The pound will probably weaken against the dollar because of the “structural weakness” in the U.K. economy, according to Robert Savage, New York-based chief strategist at currency-hedge fund FX Concepts LLC.
The currency is “toppy on a fair-value basis,” when it approaches $1.62, he said in an interview in London yesterday. “Fair value is probably around $1.45 and I would forecast the pound to weaken to $1.52 by the end of next year.”
Sterling will probably stay at $1.60 through next year, a Bloomberg survey of economists’ forecasts showed. It last traded as low as $1.52 in July 2010.
The pound has weakened 0.9 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 2.9 percent and the dollar dropped 4.2 percent.
The Debt Management Office sold 4.5 percent gilts maturing in March 2019 at an average yield of 1.128 percent. That compares with a yield of 1.495 percent at the previous auction on May 1.
The 10-year gilt yielded 1.91 percent. The price of the 1.75 percent bond due in September 2022 was 98.57.
Gilts returned 1.7 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 2.2 percent and U.S. Treasuries rose 1.4 percent.