July 8 (Bloomberg) -- The pound rose from near the weakest level in almost four months against the dollar before data that analysts said will show industrial output expanded in May, adding to evidence the U.K. recovery is gathering pace.
Britain’s currency snapped a two-day drop against the greenback after Capital Economics Ltd. said the nation may be in line for a period of “strong catch-up growth.” U.K. business confidence and output both rose to 13-month highs in June, BDO LLP said today. Sterling slumped below $1.49 last week after Bank of England policy makers led by Governor Mark Carney signaled they will keep interest rates at a record low. U.K. government bonds were little changed.
“For now we have a story of U.K. economic resilience,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in London. “If the data begins to turn the wrong way again, you have a compelling case for more pound weakness.”
The U.K. currency rose 0.3 percent to $1.4940 at 3:41 p.m. London time after sliding to $1.4859. It reached $1.4858 on July 5, the lowest level since March 12. The pound was little changed at 86.15 pence per euro after weakening to 86.33 on July 4, the least since April 17.
Britain’s economy could be in line for a period of “strong catch-up growth” once it gets through the current weakness, according to Capital Economics Ltd. The company also said the arrival of Carney, who started in his role on July 1, “could trigger more support from monetary policy.”
Industrial output rose 0.2 percent in May after gaining 0.1 percent the previous month, according to the median estimate of analysts in a Bloomberg News survey before tomorrow’s report from the Office for National Statistics.
“There is a tangible sense of optimism currently with respect to the outlook for the U.K. economy,” said Jane Foley, a senior currency strategist at Rabobank International in London.
The pound has strengthened 2.5 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar gained 4.9 percent and the euro appreciated 3.7 percent.
The U.K. recovery “remains weak” by historical standards and rising market borrowing costs pose a threat to the expansion, the Bank of England said in a statement after its July 3-4 meeting. The nine-member Monetary Policy Committee kept its benchmark interest rate at a record-low 0.5 percent and its asset-purchase target at 375 billion pounds.
Carney’s first policy meeting followed a slump in global bond markets sparked by Federal Reserve Chairman Ben S. Bernanke’s comments that the U.S. central bank is considering reducing asset purchases.
The benchmark 10-year gilt yield was at 2.48 percent after climbing to 2.59 percent on June 24, the highest since October 2011. The price of the 1.75 percent security due in September 2022 was 94.03.
A business sentiment gauge climbed for a fifth month to 94.3 from 93.6 in May, while a measure of output advanced to 94.9 from 94.4, BDO said. Still, both remain below the 95 threshold that indicates growth, it said.
“While it’s encouraging to see confidence continuing to improve, we should be mindful of the zig-zag trend that has characterized U.K. business confidence since 2008,” BDO partner Peter Hemington said.
Gilts handed investors a loss of 3.8 percent this year through July 4, according to Bloomberg World Bond Indexes. German bonds dropped 1.6 percent and Treasuries declined 3.9 percent, the indexes show.
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