Pound Gains Most Since July as U.K. Avoids Recession; Gilts Fall

The pound rose by the most since July against the dollar after a government report showed the U.K. economy grew more last quarter than analysts forecast, ensuring the nation avoided a triple-dip recession.

Sterling advanced at least 0.4 percent against all 16 of its major counterparts as Chancellor of the Exchequer George Osborne said the data are an encouraging sign the economy is improving. The Bank of England next meets on May 8-9 after policy makers were split this month on the need to provide more monetary stimulus to spur growth. U.K. government bonds fell as demand for safer assets waned.

“Sterling is trading higher and I would expect further gains,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. “The data puts another nail in the coffin for further money printing.”

The pound jumped 1.1 percent to $1.5436 at 4:10 p.m. in London after rising to $1.5480, the highest level since Feb. 19. The U.K. currency strengthened as much as 1.4 percent, the biggest intraday gain since July 26. Sterling advanced 1.2 percent to 84.26 pence per euro after touching 84.10, the strongest since Jan. 24.

Gross domestic product rose 0.3 percent in the first quarter, the Office for National Statistics said in London. The median forecast of economists in a Bloomberg News survey was for growth of 0.1 percent. From a year earlier, GDP expanded 0.6 percent, the most since the fourth quarter of 2011.

Britain Recovering

“I can’t promise the road ahead will always be smooth but by continuing to confront our problems head on, Britain is recovering and we are building an economy fit for the future,” Osborne said in a statement released by the Treasury.

The pound has strengthened 2 percent in the past month, the second-best performer after the New Zealand dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Sterling has still depreciated 2.6 percent this year.

Strength in the pound may be sustained, enabling it appreciate to as high as $1.60 by the end of the year, James Kwok, head of currency management at Amundi Asset Management in London, said in an interview with John Tucker on Bloomberg Radio’s “The First Word.”

“The consensus has been too bearish on sterling for a long time,” he said. “A lot of bad news is already in the price.”

The pound’s advance saw it strengthen beyond its 100-day moving average against the euro, currently at 84.46 pence, for the first time since Nov. 8.

Gilts Decline

The yield on the benchmark 10-year gilt rose four basis points, or 0.04 percentage point, to 1.72 percent after climbing to 1.74 percent yesterday, the highest level since April 17. The 1.75 percent bond due September 2022 fell 0.3, or 3 pounds per 1,000-pound face amount, to 100.23.

Today’s GDP report is a preliminary estimate and based on about 44 percent of the data that will ultimately be available. Six of the 37 economists surveyed by Bloomberg News had predicted a contraction.

Bank of England Governor Mervyn King has wanted to expand so-called quantitative easing for three consecutive months but has been outvoted by a majority on the nine-member Monetary Policy Committee, minutes of their meetings show.

“The data is a negative for gilts in that it allows the BOE not to embark on more QE or cut rates,” said Jason Simpson, a rates strategist at Banco Santander SA in London. “I don’t think the underperformance will be sustained given recent moves have been international in nature. The data is prone to revision and there’s some fairly optimistic assumptions. There will probably be some sort of downward revision.”

The extra yield investors demand to hold 10-year gilts instead of similar-maturity German bunds yields climbed four basis points to 49 basis points, the most since April 11.

U.K. gilts returned 1.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 0.9 percent and U.S. Treasuries rose 0.7 percent.

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