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Pound Climbs for Third Day Versus Dollar as Production Expands

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Nov. 6 (Bloomberg) -- The pound advanced for a third day against the dollar after a government report showed U.K. industrial production increased more in September than economists forecast.

Sterling reached the strongest level in almost five weeks versus the euro after Halifax said British house prices climbed for the ninth month in October, adding to signs the recovery is gaining momentum. The pound will struggle to extend gains after its recent rally, according to Bank of Tokyo-Mitsubishi UFJ Ltd. U.K. government bonds were little changed before the Bank of England announces a policy decision tomorrow.

“There’s capacity to push a bit higher against the dollar,” said Jane Foley, a London-based senior currency strategist at Rabobank International. “There’s so much good news in the price so it will be difficult to sustain gains much above $1.61.”

The pound gained 0.2 percent to $1.6073 at 4:29 p.m. London time after rising to $1.6118, the highest level since Oct. 29. The U.K. currency dropped 0.2 percent to 84.11 pence per euro after appreciating to 83.79 pence, the strongest since Oct. 3.

Sterling has rallied 4 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro climbed 3.9 percent and the dollar advanced 0.1 percent.

Output Increases

Industrial output jumped 0.9 percent from August, when it fell 1.1 percent, the Office for National Statistics said. The median forecast of economists surveyed by Bloomberg News was for an increase of 0.6 percent. Home values climbed 0.7 percent, the biggest gain in three months, according to Halifax, the mortgage unit of Lloyds Banking Group Plc.

The Bank of England will keep its key interest rate at a record-low 0.5 percent tomorrow and its asset-purchase stimulus target at 375 billion pounds, according to Bloomberg surveys of economists. Governor Mark Carney will present new quarterly forecasts on Nov. 13.

The central bank is likely to raise its estimate for this year’s economic product growth toward 1.6 percent from 1.3 percent, Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ in London, wrote in a note to clients.

“The pound has outperformed,” Hardman wrote. “However with the first BOE rate hike still appearing some way off, the pound will still likely struggle to strengthen materially in the near term.”

Improving Outlook

The U.K. outlook has “improved substantially,” the European Commission said yesterday. The Brussels-based group said gross domestic product will grow 1.3 percent this year and 2.2 percent next year, more than it previously projected.

The benchmark 10-year gilt yield was at 2.71 percent after rising to 2.74 percent yesterday, the highest since Oct. 22. The price of the 2.25 percent bond due in September 2023 was 96.02.

Ten-year yields will climb to 2.90 percent by year-end, according to the median estimate in a Bloomberg survey of 26 analysts. The median was 2.75 percent in September.

Gilts handed investors a loss of 2.8 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries fell 2.4 percent and German bonds slid 1.3 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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