Pound Jumps After U.K. Emerges From Recession; Gilts Drop

The pound climbed the most in three weeks against the dollar after Britain’s economy expanded by more than analysts forecast in the third quarter, pulling the nation out of a recession.

U.K. government bonds fell as the strongest growth in five years prompted economists at Barclays Plc and Investec Securities to abandon forecasts for the Bank of England to expand its bond-buying program next month. Sterling advanced to a one-week high versus the euro after central bank Deputy Governor Charles Bean said the economy was “past its worst.”

“The pound is getting a boost from the GDP data coming in quite a bit above market expectations,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “We could now see the pound strengthening more, particularly against the euro.”

The pound added 0.6 percent to $1.6128 at 4:21 p.m. London time, after rising as much as 0.7 percent, the steepest gain since Oct. 4. Sterling rose 0.7 percent to 80.32 pence per euro, after touching 80.29 pence, the strongest since Oct. 11.

Gross domestic product expanded 1 percent in the three months through September from the previous quarter, the fastest growth since 2007, Office for National Statistics data showed today. That exceeded the highest estimate in a Bloomberg News survey for a 0.8 percent increase.

Investors should sell the pound if it appreciates to 80.20 pence per euro, Stannard said. Morgan Stanley forecasts the currency will depreciate to 83 pence per euro by year-end.

“Although the data is strong and sterling will probably enjoy that for the next couple of days, the bigger picture is weak and for a weaker currency,” he said.

BOE Meeting

The Bank of England’s Monetary Policy Committee must decide at its meeting on Nov. 7-8 whether to end its asset-purchase program, known as quantitative easing, or extend it beyond 375 billion pounds.

“Today’s report strongly questions the case for another round of QE” in November, Audrey Childe-Freeman, head foreign-exchange strategist at Bank of Montreal in London, wrote in an e-mailed note. “A change in expectations on that front should prove supportive for sterling.”

The current round of asset purchases will probably be the last, Barclays economists including London-based Chris Crowe and Simon Hayes wrote in a note to clients after the GDP data, dropping their forecast that the central bank would expand stimulus by 50 billion pounds next month.

Stimulus Unchanged

Investec also predicts policy makers will leave the stimulus program unchanged at the next meeting, Chief Economist Philip Shaw wrote in a client note today. It revised a call for a 50 billion pound increase.

The pound has advanced 0.6 percent in the past three months according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 3.4 percent and the dollar dropped 3.8 percent.

The 10-year gilt yield climbed six basis points, or 0.06 percentage point, to 1.91 percent. The 1.75 percent bond due in September 2022 fell 0.54, or 5.40 pounds per 1,000-pound face amount, to 98.57.

The data mean “higher gilt yields in the short term,” Nigel Jenkins, a fixed-income strategist at Payden & Rygel Global Ltd., which oversees $70 billion, said in an interview on Bloomberg Television’s “The Pulse” with Maryam Nemazee.

“Somewhere between these numbers and the past few quarters is probably the reality, very muted, sub-par growth,” London-based Jenkins said.

Higher Yields

Ten-year gilt yields may rise as much as 40 basis points in the next three-to-six months, he predicted. The 10-year rate will advance to 2.14 percent by the end of the second quarter of next year, according to analyst estimates compiled by Bloomberg.

Britain is the first of the Group of Seven nations to announce GDP data for the third quarter. The report today is an initial estimate and the figures are subject to revision when the statistics office gets more information.

“It’s going to take time, probably several months, but I would like to make people more optimistic about the future,” the Bank of England’s Bean said in an interview published on the Daily Post newspaper’s website today.

Governor Mervyn King said this week that the recovery is proceeding at a “slow and uncertain” pace and a “zig-zag” pattern is likely to persist.

Gilts have returned 2.4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 2.6 percent and Treasuries earned 1.6 percent.

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