The pound rose to a three-week high against the dollar as an industry report showed U.K. services output expanded more than analysts forecast, adding to signs the economy is gathering momentum.
Sterling climbed to the strongest level in two weeks versus the euro as the survey of purchasing managers supported the case for the Bank of England to refrain from further monetary stimulus that tends to devalue a currency. The central bank started a two-day meeting today amid speculation policy makers will leave the asset-purchase target unchanged. U.K. gilts rose, with the 10-year yield falling from near a 12-week high.
“The pound strengthened on the back of the stronger-than-expected service PMI survey, which is consistent with the pace of economic recovery accelerating further in the second quarter,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “That’s helping to support the pound in the near term and will push back expectations that the Bank of England may ease monetary policy further.”
The pound gained 0.5 percent to $1.5392 at 4:54 p.m. London time after climbing to $1.5403, the highest level since May 10. Sterling rose 0.5 percent to 85.03 pence per euro after appreciating to 84.97 pence, the strongest since May 21.
The U.K. currency will trade at around $1.50 and be “stable” against the euro at 85 pence during the next three months, Bank of Tokyo-Mitsubishi’s Hardman said. Sterling will weaken to $1.49 by year-end, according to the median of 57 estimates compiled by Bloomberg.
Markit Economics and the Chartered Institute of Purchasing and Supply said their index of service industries rose to 54.9 in May from 52.9 the previous month. That’s higher than the forecast of 53.1 in a Bloomberg News survey of economists and the most since March 2012. A reading above 50 shows expansion.
Separate Markit reports this week on manufacturing and construction both showed growth. The British Retail Consortium said yesterday that like-for-like retail sales increased an annual 1.8 percent last month, while Nationwide Building Society said on May 30 that U.K. house prices rose the most in 18 months on an annual basis.
“Recent U.K. growth, retail and housing data, coupled with today’s PMI services figures will attract further inwards and homegrown investment relative to the euro zone,” Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London, wrote in an e-mailed comment. “The pound is and should continue to outperform going forward.”
The pound has gained 3.9 percent in the past three months, the best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 2 percent and the euro strengthened 2.3 percent.
The Bank of England will leave its bond-purchase target at 375 billion pounds at this week’s meeting, according to all but one of 43 forecasts in a Bloomberg survey of economists. The meeting is the last chaired by Governor Mervyn King before his successor Mark Carney takes over on July 1. Policy makers will keep the main interest rate at a record-low 0.5 percent, a separate Bloomberg survey shows.
The 10-year gilt yield dropped two basis point, or 0.02 percentage point, to 2.01 percent after climbing to 2.06 percent on June 3, the highest level since March 8. The 1.75 percent bond due in September 2022 rose 0.2, or 2 pounds per 1,000-pound face amount, to 97.795.
Gilts handed investors a loss of 1.3 percent this year through yesterday, according to the Bloomberg U.K. Sovereign Bond Index. German bonds dropped 0.9 percent and U.S. Treasuries declined 1.1 percent.