The pound advanced, appreciating to a four-year high versus the yen, on speculation the U.K. economy will outperform those of its major counterparts.
Sterling rose for a second day against Japan’s currency after a government report showed growth in the Asian nation’s economy cooled last quarter. The pound extended this month’s gain versus the euro after Europe’s statistics office said the region’s gross domestic product came close to a halt in the third quarter. The Bank of England signaled yesterday it may raise interest rates sooner than it previously predicted as the economy improves. U.K. government bonds rose.
“The pound outperformed the euro and the yen on the comparative economic outlook and that will affect differences in yields,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “The BOE will hold rates until the fourth quarter next year, although they would probably prefer to hold them a little longer. But the euro region and Japan have no rates hikes on the horizon.”
The pound jumped 0.9 percent to 160.71 yen at 4:31 p.m. London time after rising to 160.92, the highest level since August 2009. The U.K. currency gained 0.3 percent to 83.78 pence per euro after appreciating 0.6 percent yesterday. Sterling climbed 0.2 percent to $1.6085.
UBS AG recommended investors should add to bets the pound will extend gains versus the yen if Britain’s currency closes above 159.99, with a price target of 168.
Japan’s GDP growth slowed to an annualized 1.9 percent from 3.8 percent in the previous quarter, the Cabinet Office said in Tokyo. The euro-area economy expanded 0.1 percent in the three months through September, compared with a 0.3 percent expansion in the second quarter, the statistics office in Luxembourg said.
Sterling rose yesterday after the Bank of England signaled in its quarterly Inflation Report that officials may increase borrowing costs earlier than previously forecast as the economy improves. Britain has “one of the strongest recoveries in the advanced world,” Governor Mark Carney said.
The pound gained 3.8 percent in the past three months, the best performer among 10 developed-market counterparts tracked by Bloomberg Correlation-Weighted Indexes. The euro climbed 1.4 percent, while the dollar weakened 0.4 percent.
The pound fell in earlier trading after the Office for National Statistics said U.K. retail sales including fuel unexpectedly dropped 0.7 percent in October, after rising 0.6 percent the previous month. The median forecast in a Bloomberg News survey of economists was for no change.
The retail sales number “raises a risk to the strong trend we’ve seen but I don’t think one month’s figures are going to change the market’s opinion on the recovery,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “If the data continue to remain robust then that should help the pound to strengthen gradually.”
The pound extended gains versus the dollar after Federal Reserve Chairman nominee Janet Yellen signaled she will carry on the central bank’s unprecedented stimulus until she sees improvement in an economy.
“The perception in the market is that the BOE has brought forward its expectations regarding the first rate hike this week,” said Jane Foley, a senior currency strategist at Rabobank International. “The Fed and the ECB are both ultra-dovish. There are expectations of more Bank of Japan easing next year after today’s GDP data highlighted weak consumption.”
Gilts advanced with Treasuries and German bunds following Yellen’s testimony.
The benchmark 10-year gilt yield fell five basis points, or 0.05 percentage point, to 2.76 percent. The 2.25 percent bond maturing in September 2023 rose 0.38, or 3.80 pounds per 1,000-pound face amount, to 95.67.
The extra yield investors demand to hold 10-year gilts instead of similar-maturity German bunds was little changed at 106 basis points. The spread ended yesterday at 107 basis points, the widest since October 2005 based on closed prices.