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Pound Advances to Strongest Since January After GDP; Gilts Fall

The pound rose to the strongest level since January against the dollar after a government report confirmed Britain’s economic growth accelerated in the third quarter, boosting demand for U.K. assets.

Sterling advanced versus all of its 16 major counterparts as the data showed investment and house building helped to offset a decline in exports, adding to evidence the recovery is gaining traction. U.K. gilts declined as demand for safer assets waned even after policy maker Ian McCafferty said the Bank of England is not in a rush to increase interest rates. Thirty-year bonds fell before the Debt Management Office sells 2.5 billion pounds ($4.1 billion) of securities due in 2044 tomorrow.

“The report showed the strengthening of the U.K. economy is being driven by domestic factors,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “It’s consistent with the picture that we already knew, that the U.K. economy is strengthening. The break to the upside for pound versus the dollar was a reflection of it moving above the recent highs and that’s encouraged a squeeze higher.”

Sterling rose 0.4 percent to $1.6275 at 4:36 p.m. London time after advancing to $1.6331, the highest since Jan. 2. The U.K. currency gained 0.3 percent to 83.41 pence per euro after appreciating to 83.01 on Nov. 7, the strongest since Jan. 17.

Gross domestic product grew 0.8 percent, matching an initial estimate, the Office for National Statistics said. Business investment rose 1.4 percent, while exports dropped 2.4 percent. Consumer spending climbed for an eighth quarter, rising 0.8 percent, while government spending increased 0.5 percent.

Pound’s Advance

The pound has gained 7.5 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes amid speculation a strengthening economy will prompt the Bank of England to increase borrowing costs. The euro appreciated 4.4 percent, while the dollar fell 1.1 percent.

“Potentially, a very strong upside break is developing today in the pound versus the dollar,” Richard Adcock, a technical strategist at UBS AG in London, wrote in a note to clients. “With the resistance giving way this morning, the risk is now for a continuation of strength over the coming weeks,” he said, referring to the pound’s break above its October high of $1.6260.

A close above $1.6265 today “will be a new buy signal, opening the door for a break of the January high,” Adcock wrote. The pound advanced to $1.6381 on Jan. 2, the strongest since August 2011.

Growth Forecasts

The Bank of England raised its growth forecasts this month and brought forward its prediction for when the unemployment rate will fall to the 7 percent threshold at which policy makers will consider raising the key interest rate.

“With the BOE relegating guidance to the back seat and saying they will hike rates only when they are good and ready, the economy will get a lot of monetary support,” Rob Wood, an analyst at Berenberg Bank in London, wrote today in a note to clients. “That should help ensure the recovery continues and broadens out.”

The benchmark 10-year gilt yield climbed three basis points, or 0.03 percentage point, to 2.76 percent after increasing to 2.87 percent on Nov. 21, the highest since Sept. 24. The 2.25 percent bond due in September 2023 fell 0.215, or 2.15 pound per 1,000-pound face amount, to 95.675.

The U.K. last sold 30-year debt on Sept. 10 at an average yield of 3.743 percent, compared with a rate of 3.553 percent at a previous auction on July 11. The 30-year gilt yield added three basis points to 3.59 percent today.

Forward Guidance

There’s spare capacity in the job market and record-low borrowing costs may be needed even after unemployment falls to the threshold set under forward guidance, Governor Mark Carney told lawmakers on Parliament’s Treasury Committee yesterday.

There is “clearly sensitivity with interest rates when you start on a very low level,” McCafferty was quoted by the Brentwood Gazette as saying. “Even a small increase can make a big change and so we’re very sensitive to that fact.”

Gilts handed investors a loss of 2.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities fell 1 percent and U.S. Treasuries declined 2.2 percent.

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