Pound Gains Most in Seven Months on Qatar Report, Budget Outlook

The pound rose the most in seven months versus the dollar on speculation Qatar will invest in infrastructure projects, boosting demand for sterling amid calls for growth-based policies in the government’s annual budget.

The so-called 10-year break-even rate, which predicts the annual rate of inflation over the next decade, climbed to the highest in 4 1/2 years. Sterling rose for a third day against the euro and advanced against all but two of its 16 major peers. U.K. and Qatari officials and ministers have held talks on potential projects, the Financial Times reported today without saying where it got the information.

The Qatar report “is causing the market to cut its short pound positions,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. Sterling “could go to the $1.5150 area but still remains in an overall downward channel.”

The pound climbed 1.1 percent to $1.5091 at 5:03 p.m. London time, after advancing 1.2 percent, the steepest gain since July 26. It rose 0.7 percent to 86.28 pence per euro after reaching 86.16, the strongest since March 5.

“What you’re seeing is probably some nascent profit-taking on long euro-sterling positions,” said Peter Kinsella, a currency strategist at Commerzbank AG in London, referring to a bet an asset will gain. “If you do see euro-sterling up towards 88 to 90, at those levels the pound is looking pretty attractive from a valuation point of view.”

The pound last traded at 90 pence per euro in July 2011.

Annual Budget

Chancellor of the Exchequer George Osborne will deliver the budget on March 20 amid an economy that is forecast to have contracted 0.3 percent in the fourth quarter and after a national statistics office report on March 12 showed industrial production unexpectedly dropped in January.

Confederation of British Industry Director-General John Cridland called on the government in February to boost infrastructure investment to promote a rebalancing of the economy.

Sterling has depreciated 5.2 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. It has fallen 7.2 percent against the dollar and 5.9 percent versus the euro.

Currency Crisis

The U.K. is risking a currency crisis, according to James Rickards, senior managing director at Tangent Capital Partners LLC in New York, citing the nation’s lack of gold.

The government disposed of all of Britain’s gold reserves more than a decade ago, selling 400 tons of the precious metal in a two-and-a-half year period ending in March 2002.

“Look for sterling to go down a lot,” Rickards said in an interview on Bloomberg Television’s “On The Move” with Francine Lacqua.

The pound’s advance today may have been the result of a so-called short squeeze, according to Daragh Maher, a strategist at HSBC Bank Plc in London. A short squeeze is when traders are forced to buy back a security whose price is rising after they sold it short, expecting the price to fall.

Rabobank International strategist Jane Foley said the drop may have been the result of the expiration of options with stops above $1.50.

Sterling may reach the strongest level in seven weeks against the euro if it breaks through 85.76 pence as the market is “stretched” above its 233-day Bollinger band, according to Skandinaviska Enskilda Banken AB technical analysts Anders Soderberg and Dag Muller in a e-mailed note.

The currency may appreciate to 84.44 pence per euro, the analysts wrote.

Bollinger Bands

Bollinger bands are designed to alert investors when a security rises too high or falls too low by comparing its price to the average level over the past 20 days. The system of analysis was created in the 1980s by John Bollinger.

U.K. inflation expectations earlier rose to the highest in 4 1/2 years on speculation the government will allow the central bank to place less emphasis on maintaining price stability when it announces its budget next week.

Bank of England Governor-designate Mark Carney has signaled support for allowing the bank more flexibility in meeting its 2 percent inflation goal. He told lawmakers in February that taking longer to meet inflation goals if necessary was “superior” to refocusing on other aims.

The 10-year break-even rate, which measures the yield difference between gilts and index-linked securities, climbed as high as 3.37 percent, the highest since September 2008, before falling to 3.31 percent.

Widened Spreads

“If you look at break-even spreads, they’ve widened sharply in the run-up to the budget, so I think the inflation market is very much expecting some kind of relaxation of the inflation target,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London.

The benchmark 10-year gilt yield was little changed at 1.96 percent. The 1.75 percent bond due September 2022 changed hands at 98.17.

U.K. government bonds handed investors a loss of 1.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 0.7 percent and Treasuries fell 0.9 percent.

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