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Pound Climbs From 10-Week Low on Bets Drop Overdone, GDP Growth

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May 23 (Bloomberg) -- The pound climbed from a 10-week low versus the dollar amid speculation its 3 percent fall this month was excessive and as a government report confirmed the U.K. economy returned to growth in the first quarter.

Sterling advanced against most of its 16 major peers as the report showed inventories increased and consumer spending rose. Bank of England Governor Mervyn King said on May 15 that a recovery was in sight. The central bank also boosted its economic forecast, predicting growth will quicken to 0.5 percent this quarter. U.K. government bonds were little changed.

“In view of the scale of the move there may be an opportunity to pick up some sterling at cheaper levels,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “We could be getting to the stage where we’re pricing in too much concern. There’s a fair amount of event risk priced into the pound already.”

The pound strengthened 0.3 percent to $1.5101 at 4:43 p.m. London time after dropping to $1.5014, the weakest since March 14. Sterling depreciated 0.1 percent to 85.54 pence per euro.

Gross domestic product rose 0.3 percent, matching an estimate published on April 25, the Office for National Statistics said. Inventories increased by 2.5 billion pounds in the quarter, adding 0.4 percentage point to GDP. Consumer spending rose 0.1 percent.

“There is a welcome change in the economic outlook,” King said on May 15, when the central bank published its quarterly Inflation Report. “We don’t see a particularly rapid recovery in the next few quarters but we do see a recovery and I think there are good reasons for that.”

Pound Recommendation

Investors should buy the pound versus the dollar, targeting an advance to $1.54, according to Adrian Schmidt, a currency strategist at Lloyds Banking Group Plc in London. They should exit the trade if the U.K. currency declines to $1.4980, he wrote in a note to clients.

The pound has weakened 3.2 percent this year, the second-worst performer after the yen among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 5.1 percent and the euro rose 2.7 percent.

The 10-year gilt yielded 1.91 percent. The price of the 1.75 percent bond maturing in September 2022 was at 98.61.

Gilts lost 1.9 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 1 percent and Treasuries fell 1.5 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