Pound Climbs to Three-Week High as U.K. Raises Growth Forecasts

Updated on

The pound rose to a three-week high versus the euro as Chancellor of the Exchequer George Osborne announced forecasts for stronger U.K. growth as he outlined his end-of-year spending and tax plans in Parliament.

Sterling strengthened against all but two of its 16 major peers as Osborne said the economy will grow 2.4 percent in 2015, revised from 2.3 percent. Britain will borrow about 5 billion pounds ($7.9 billion) more in the current fiscal year than previously forecast in March, Osborne said, as he announced measures including changes to a tax on property sales. Data today showed services expanded in November faster than analysts estimated.

“Although the borrowing numbers have gone up, it’s not as much as the market was expecting,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “Sterling is holding up as a result of that. These numbers look to be more encouraging.” While the medium-term “reaction is probably likely to be one of a sigh of relief,” longer-term “there’s still a lot of challenges and risks for sterling,” he said.

The U.K. currency gained 1 percent to 78.40 pence per euro at 4:03 p.m. London time, after touching 78.37 pence, the strongest level since Nov. 12. The pound rose 0.5 percent to $1.5717.

Contrasting PMI

Britain will borrow 91.3 billion pounds in the current fiscal year, Osborne said, citing estimates from the Office for Budget Responsibility. The OBR forecast in March that borrowing would be 86.4 billion pounds after accounting changes that took effect three months ago.

Sterling was higher before the Chancellor’s statement after Markit Economics said its purchasing managers index for the services industry rose to 58.6 last month from 56.2 in October, which was a 17-month low. The median estimate of analysts in a Bloomberg News survey was 56.5. Euro-area services and manufacturing grew less in November than initially estimated pointing to economic growth of just 0.1 percent this quarter, a separate report showed today.

Any advances by the pound will be contained as the U.K. economy is vulnerable to the slowdown in the euro area, meaning the Bank of England will probably keep interest rates at a record low for longer, according to Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London.

Spillover Effects

“Domestically focused services are doing OK, but it still remains to be seen whether or not that is sustainable and then you are going to eventually have spillover effects” from the euro area, Kinsella said. “You have to expect, longer term, euro-sterling to trade at lower levels but that’s purely a reflection of idiosyncratic euro weakness rather than sterling strength.”

The pound has gained 4.7 percent in the past year, the biggest advance after the dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. In the past month, it has declined 0.3 percent, as investors reduced wagers on higher interest rates from the Bank of England amid concern a slowdown in the euro area will infect Britain. BOE policy makers are due to announce their latest decision tomorrow.

Forward contracts based on the sterling overnight interbank average, or Sonia, show traders have delayed bets for a 25 basis-point increase in the U.K. benchmark rate to beyond October. As recently as August, the market was priced for an increase in February. The BOE’s official bank rate has been at 0.5 percent since March 2009.

“The key thing remains the potential return of real earnings growth,” Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London, said after Osborne’s announcement. “If we see that U.K. activity will remain firm, sterling should garner traction as the market is too relaxed about stable rates.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE