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Pound Jumps to 1-Month High Versus Euro on Services; Gilts Slide

Pound Currency
Sterling rallied for a second day versus the dollar after an independent economic institute raised its forecasts for Britain’s economic growth. Photographer: Simon Dawson/Bloomberg

Nov. 5 (Bloomberg) -- The pound advanced, climbing to the strongest in a month against the euro, after an industry report showed U.K. services output expanded at the fastest pace in 16 years in October.

Sterling gained the most in two weeks versus the dollar after an independent economic institute raised its forecasts for Britain’s economic growth, saying a pickup in house prices will stoke consumer spending. Short-sterling futures contracts fell, a sign that traders are adding to bets for higher borrowing costs. U.K. government bonds fell as demand for safer assets waned. The Debt Management Office sold 1.25 billion pounds ($2.01 billion) of inflation-linked securities.

“This underlines the resilience of the U.K. economy,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, referring to the services data. “This is supportive for sterling. It makes sense to sell the euro against the pound.”

The pound jumped 0.8 percent to 83.97 pence per euro at 4:30 p.m. London time after appreciating to 83.92 pence, the strongest level since Oct. 3. The U.K. currency rose 0.5 percent to $1.6048, the biggest gain since Oct. 22.

Sterling may extend its rally to 83.75 pence per euro this week, CIBC’s Stretch said.

The U.K. economy will expand 1.4 percent this year and 2 percent in 2014, the National Institute of Economic and Social Research said, raising both of its earlier forecasts by 0.2 percentage point.

‘Every Measure’

“The housing market has thawed quite noticeably by almost every measure you want to look at,” Simon Kirby, an economist at the institute in London, said yesterday at a press conference. The Bank of England will probably increase its benchmark interest rate in the second half of 2015, he said.

U.K. policy makers meeting on Nov. 7 will leave their benchmark interest rate at a record-low 0.5 percent and the asset-purchase target at 375 billion pounds, according to Bloomberg surveys of economists. Governor Mark Carney presents new quarterly forecasts on Nov. 13.

The implied yield on short-sterling futures expiring in September 2015 increased 16 basis points to 1.25 percent.

An index of services based on a survey of purchasing managers rose to 62.5, the highest level since May 1997, from 60.3 in September, Markit Economics said. The gauge, which has been above the 50 level that divides expansion from contraction since January, was forecast to fall to 60 in a Bloomberg survey.

‘More Constructive’

“We have turned more constructive on sterling as data has persistently surprised to the upside over the last few months,” BNP Paribas SA strategists including Kiran Kowshik in London wrote in a note to clients. “Data will need to disappoint more consistently to trigger a substantial unwind.”

The pound gained 4.2 percent in the past six months, the most among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro climbed 3.9 percent and the dollar rose 0.8 percent.

The yield on the benchmark 10-year gilt climbed 10 basis points, or 0.1 percentage point, to 2.72 percent after reaching 2.74 percent, the highest since Oct. 22. The 2.25 percent bond due in September 2023 fell 0.805, or 8.05 pounds per 1,000-pound face amount, to 95.965.

The U.K. sold inflation-linked gilts due in March 2052 at a real yield of 0.032 percent. The yield on previously issued securities in the secondary market climbed three basis points to 0.05 percent.

The government plans to sell 2.25 billion pounds of 4.25 percent gilts maturing in 2036 on Nov. 14, the debt agency said today in a statement.

Gilts lost 2.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries slid 2.1 percent and German bonds declined 0.9 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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