Pound Advances as U.K. Financial Optimism Improves; Gilts Rise

The pound strengthened for the first time in three days against the dollar after an industry report showed optimism in the U.K.’s financial industry improved in the third quarter, underlining the strength of the British economy.

Sterling advanced versus all except one of its 16 major counterparts before the Bank of England’s announces its policy decision on Thursday. The U.K. currency fell last week as Bank of America Merrill Lynch said the rally that propelled it to a nine-month high versus the dollar would wane. U.K. government bonds rose after U.S. Treasury Secretary Jacob J. Lew said America risks defaulting on its payments, boosting demand for haven assets.

“At the moment, you can’t ignore the data,” said Paul Robson, senior currency strategist at Royal Bank of Scotland Group Plc in London. “People have to decide whether the longer-term outlook for sterling is still challenging or the pickup in data that we’ve seen suggests that the recovery will be robust. We think sterling is starting to look” too strong at current levels, he said.

The pound climbed 0.5 percent to $1.6088 at 4:29 p.m. London time, sliding 1.3 percent during the previous two days. The U.K. currency strengthened 0.3 percent to 84.44 pence per euro after depreciating 1.1 percent last week.

Sterling will weaken to $1.55 by year-end, Royal Bank of Scotland’s Robson predicted.

A net 53 percent of respondents to a survey by the Confederation of British Industry and PricewaterhouseCoopers LLP said they were more optimistic about their business in the third quarter, up from 31 percent in the previous three months.

Improving Data

Sterling climbed to $1.6260 on Oct. 1, the highest level since Jan. 2, as improving economic data prompted investors to increase bets the central bank would raise borrowing costs earlier than it had predicted. Services activity expanded in the month and house prices climbed, reports showed last week.

The pound advanced 5.3 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar was little changed and the euro rose 5 percent.

Citigroup Inc.’s Economic Surprise Index for the U.K. fell to 49.60 on Oct. 3, the lowest since Aug. 1. The gauge, which indicates whether data beat or fell short of forecasts, climbed to this year’s high of 113.30 on Aug. 19.

BOE Meeting

Bank of England policy makers led by Governor Mark Carney have said they will keep interest rates at a record low at least until unemployment falls to 7 percent, which they don’t see happening until late 2016. The unemployment rate measured by International Labour Organization methods was 7.7 percent in the three months through July, the Office for National Statistics said Sept. 11.

The central bank will keep its benchmark rate at 0.5 percent and its asset-purchase stimulus target at 375 billion pounds when it announces its policy decision on Oct. 10, according to Bloomberg News surveys of economists.

The benchmark 10-year gilt yield slid four basis points, or 0.04 percentage point, to 2.71 percent. The 2.25 percent security due in September 2023 rose 0.295, or 2.95 pounds per 1,000-pound face amount, to 96.065.

Treasuries and bunds also advanced as U.S. lawmakers remained at odds over an emergency budget needed to end a government shutdown. The administration of President Barack Obama has said it won’t negotiate with Republicans over funding the government or raising the debt ceiling, arguing those are among the basic functions of Congress.

“On the 17th, we run out of our ability to borrow, and Congress is playing with fire,” Lew said yesterday on CNN’s “State of the Union.”

The U.K. Debt Management Office is scheduled to sell 1.75 billion pounds of inflation-linked bonds due in 2019 tomorrow.

Gilts lost 3.1 percent this year through Oct. 4, according to Bloomberg World Bond Indexes. German bonds dropped 1.9 percent and Treasuries declined 2.5 percent.

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