Pound Extends World-Beating Gain on U.K. Growth Prospects

The pound, the best-performing major currency in the past year, strengthened after the Bank of England said further gains are possible as Britain’s economy expands amid falling unemployment.

Sterling climbed against all of its 16 major peers as the government presented higher growth forecasts during today’s budget address. The pound has gained 10 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, on signs accelerating growth will prompt the Bank of England to raise interest rates. U.K. gilts pared declines after the debt office announced the lowest bond sales since 2007.

“It’s our base-case scenario that the pound goes higher,” said Steven Saywell, global head of foreign-exchange strategy at BNP Paribas SA in London. “Expectations are for sterling to rise again if the data continues to come out stronger.”

The pound strengthened 0.4 percent to 83.65 pence per euro at 4:36 p.m. London time after depreciating to 84 pence, the weakest level since Dec. 25. The U.K. currency gained 0.2 percent to $1.6633.

The pound climbed versus all 31 major currencies in the past 12 months, rising most against the Argentine peso and Turkish lira. It strengthened more than 9 percent against the dollar in that period.

Pound Climbs

Sterling will appreciate to 81 pence per euro by the end of the year, according to the median of analyst estimates compiled by Bloomberg. Citigroup Inc., the world’s second-biggest currency trader, forecasts the pound will climb to $1.74 by the end of June, the highest prediction for the end of the second quarter. The pound will trade at $1.63 by year-end, a separate survey shows.

The Office for Budget Responsibility revised up its forecasts for economic growth, Chancellor of the Exchequer George Osborne said in Parliament today. The fiscal watchdog sees the economy growing 2.7 percent this year from the 2.4 percent it predicted in December. Gross domestic product will increase 2.3 percent in 2015 and 2.6 percent in 2016 and 2017.

“The economy is continuing to recover and recovering faster than forecast,” Osborne said.

The jobless rate in the three months through January, as measured by International Labour Organization methods, was 7.2 percent, the same as in the final quarter of 2013, the Office for National Statistics said in London. That’s in line with the median forecast of economists in a Bloomberg survey. The rate has fallen from 7.8 percent a year ago. Jobless claims fell 34,600 in February, more than analysts had forecast.

Damping Inflation

The strong U.K. currency is damping inflation, central bank officials said in the minutes of the Monetary Policy Committee’s March 5-6 meeting published today.

“Sterling had appreciated by another 1.5 percent during the month, and it was possible that this gradual appreciation would continue if prospects in the U.K. continued to be seen as increasingly favorable relative to those of its main trading partners,” the central bank said in the minutes.

Officials voted unanimously to keep interest rates at a record-low 0.5 percent and maintain the asset-purchase target at 375 billion pounds, the minutes showed.

“If sterling continues to appreciate it combats inflation and that does take pressure off the Bank of England to hike, not completely, but it would remove the urgency of a rate hike,” BNP Paribas’ Saywell said.

Gilt Sales

U.K. bonds pared declines as the Debt Management Office announced that gilt sales would be 128.4 billion pounds for the new fiscal year, starting next month, down from a revised 153.4 billion pounds in the current year. That’s lower than the median forecast of 19 primary dealers surveyed by Bloomberg for 151 billion pounds.

The U.K. two-year yield was little changed at 0.64 percent after climbing four basis points, or 0.04 percentage point, to 0.67 percent, the highest since March 7. The price of the 2 percent gilt maturing in January 2016 was at 102.485.

The 10-year gilt yield increased two basis points to 2.69 percent, after advancing to 2.72 percent.

The drop in sales was aided by an increase in the contribution from National Savings & Investments to 13 billion pounds, as well as lower central government net cash requirement, Sarah Ellis, a spokeswoman for the DMO in London, said in an e-mailed response to questions.

Thirty-year yields rose four basis points to 3.48 percent.

Gilts returned 2.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. U.S. Treasuries gained 2 percent and German securities rose 2.5 percent.

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