Pound Climbs to Eight-Week High as Retail Sales Rise; Gilts Fall

The pound strengthened to an eight-week high against the dollar after U.K. retail sales increased in July more than analysts forecast, adding to evidence Britain’s economy is gathering pace.

Sterling advanced for a fifth day against the euro, the longest run of gains since April, as the improving data spurred bets the Bank of England will need to raise interest rates to restrain inflation. U.K. government bonds fell, pushing 10-year yields to the highest since August 2011, as demand for the safety of fixed-income assets waned. Britain’s borrowing costs rose as the Debt Management Office sold 2.25 billion pounds ($3.5 billion) of 20-year gilts.

“It’s consistent with all the data that has come out recently,” said Adam Cole, head of Group-of-10 foreign-exchange strategy at Royal Bank of Canada in London. “We are generally bullish on sterling.”

The pound advanced 0.5 percent to $1.5574 at 4:43 p.m. London time after rising to $1.5594, the highest level since June 19. The U.K. currency appreciated 0.4 percent to 85.18 pence per euro after reaching 85.05 pence, the strongest since July 3.

Sterling jumped 4.1 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 2.9 percent and the dollar strengthened 3.7 percent.

Positive Signs

The pound has rallied as reports showed purchasing managers indexes of manufacturing, services and construction all improved in July while house prices increased and economic growth accelerated in the second quarter.

U.K. retail sales including fuel climbed 1.1 percent last month from June, when they increased 0.2 percent, the Office for National Statistics said in London. Economists surveyed by Bloomberg predicted a gain of 0.7 percent.

Bank of England governor Mark Carney said last week policy makers plan to keep the benchmark interest rate at a record-low 0.5 percent until the jobless rate falls to 7 percent, which they don’t expect until at least the fourth quarter of 2016.

Seventeen of 25 forecasters in a Bloomberg survey predict unemployment will fall to the level by mid-2016, with 13 predicting it will happen in 2015 at the latest.

Short-sterling futures contracts expiring in September 2016 fell, signaling traders are adding to bets interest rates will rise. The implied yield increased as much as 15 basis points to 2.23 percent, the highest since June 25.

‘Decent Improvement’

“The pound has been doing better,” said Peter Kinsella, senior foreign-exchange strategist at Commerzbank AG in London. “The main factors have been a decent improvement on the yield side and positive PMI and unemployment data. The economy is slightly better but that’s coming from a low base.”

The 10-year gilt yield climbed five basis points, or 0.05 percentage point, to 2.68 percent after reaching 2.71 percent, the highest since Aug. 9, 2011. The 1.75 percent bond due in September 2022 fell 0.345, or 3.45 pounds per 1,000-pound face amount, to 92.535.

Investors boosted bets that inflation will stay above the central bank’s 2 percent target over the next decade.

The 10-year break-even rate, derived from the difference in yield between gilts and index-linked bonds, climbed as much as four basis points to 3.12 percentage points, the highest level since July 17. The rate, which reflects the inflation level traders expect during the life of the security, has jumped from a 2013 low of 2.65 percentage points set in January.

The 30-year measure reached 3.58 percentage points, the most since July 2011.

The U.K. sold gilts maturing in September 2034 at an average yield of 3.52 percent, compared with 2.79 percent at the previous sale of 20-year securities on June 13.

“It certainly wasn’t the strongest result,” said Sam Hill, a gilts strategist at RBC Capital Markets in London. “The momentum behind this idea there’s an economic recovery taking hold is putting upward pressure on yields across markets.”

Gilts lost investors 4.3 percent this year through yesterday, Bloomberg World Bond Indexes show. German securities dropped 2 percent and Treasuries declined 3.1 percent.

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