March 5 (Bloomberg) -- The pound strengthened the most in three weeks against the euro after an industry report showed U.K. services output expanded in February, adding to signs Britain’s economy is gaining momentum.
Sterling rose for the first time in three days versus the dollar, climbing through the $1.67 level, which Morgan Stanley said would give fresh impetus to its appreciation. An advance above that would open the way for an increase to around $1.695, analysts at the company, including London-based head of European-currency strategy Ian Stannard, wrote in a research note today. That would be the highest level since August 2009. U.K. government bonds fell for a second day.
“There is still short-term upside potential for sterling in this environment,” London-based Stannard said. “We are seeing some more encouraging data coming through from the U.K., providing signs of a more balanced growth picture.”
The pound appreciated 0.4 percent to 82.10 pence per euro at 4:32 p.m. London time, the biggest gain since Feb. 12. The U.K. currency rose 0.4 percent to $1.6727 after advancing to $1.6823 on Feb. 17, the strongest since November 2009.
Markit Economics said its index of U.K. services based on a survey of purchasing managers was 58.2 last month from 58.3 in January. The median estimate of economists in a Bloomberg News survey was 58. Readings above 50 show growth.
The pound has rallied 12 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes amid optimism the Bank of England will raise interest rates sooner than it predicts. The euro rose 6.4 percent and the dollar gained 0.6 percent.
The central bank starts a two-day meeting today, with all 52 economists surveyed by Bloomberg forecasting it will keep the main interest rate at a record-low 0.5 percent, where it’s been since March 2009.
The government has more than 35 billion pounds of 2.25 percent bonds maturing on Friday, data compiled by Bloomberg show. The Bank of England’s holdings of the securities, purchased as part of its asset-purchase program has a face value of 8.2 billion pounds.
The Bank of England said in its quarterly Inflation Report last month that it intends to maintain the stock of purchased assets at least until the first increase in its benchmark rate.
The 10-year gilt yield increased two basis points, or 0.02 percentage point, to 2.72 percent after climbing five basis points yesterday. The 2.25 percent bond due September 2023 fell 0.165, or 1.65 pounds per 1,000-pound face amount, to 96.105.
Gilts returned 2.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. U.S. Treasuries advanced 1.8 percent and German bonds rose 2.4 percent.
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