Pound’s World-Beating Gains Set for Reinforcement From Economy

The pound, the developed world’s best-performing currency over the past three months, may get another boost from signs of economic strength.

Even with the prospect of Chancellor of the Exchequer George Osborne announcing an acceleration of austerity in his special budget on July 8, data due next week from housing to industrial production will point to an economy that is gaining momentum, analysts said. Among the major currencies, sterling has been supported by speculation that the Bank of England, which decides on monetary policy next week, will be the first major central bank to raise interest rates after the Federal Reserve.

“The market is still quite optimistic for the pound,” said Jane Foley, a senior currency strategist at Rabobank International in London. While there are “significant headwinds for the pound” the “more constructive outlook has been supportive. That boils down to continued appreciation of sterling against the euro.”

The pound fell this week for the first time since June 5 versus the euro, having touched the strongest level in more than seven years, as a survey showed Greece’s voters were split before a referendum Sunday on whether to accept the terms of a European financial bailout.

Sterling weakened 0.5 percent this week to 71.29 pence per euro as of 5:15 p.m. London time on Friday. It touched 69.89 pence on June 29, the strongest level since November 2007. The pound dropped for a second week versus the dollar, falling 1.1 percent from June 26 to $1.5580.

Best Performer

The pound has strengthened 5.8 percent in the past three months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. It’s been supported by signs Britain’s economic recovery is gathering pace. The euro gained 2.2 percent and the dollar advanced 0.8 percent, the indexes showed.

U.K. house prices climbed 0.3 percent last month, rebounding from a 0.1 percent drop in May, mortgage lender Halifax, a division of Lloyds Banking Group, will say next week, according to a Bloomberg survey of economists. A government report on July 7 will show that industrial production grew on an annual basis in May by the most since November, according to a separate Bloomberg survey.

U.K. government bonds rose, with the 10-year gilt yield dropping the most in more than three months.

Benchmark 10-year yields fell 19 basis points, or 0.19 percentage point, this week to 2 percent, the biggest decline since March 20. The 5 percent bond due in March 2025 rose 1.845, or 18.45 pounds per 1,000-pound face amount, to 126.29.

BOE policy makers led by Governor Mark Carney will keep interest rates at a record-low 0.5 percent, according to all 39 economists in a Bloomberg survey before the decision is announced on July 9. Officials will maintain their asset-purchase program at 375 billion pounds, a separate Bloomberg survey of analysts showed.

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