Pound Strengthens Most in Nine Months as U.K. Avoids Recession

The pound jumped the most in nine months against the dollar this week as a government report showed the U.K. economy avoided a recession last quarter, damping speculation the Bank of England will boost stimulus.

Sterling strengthened versus all except one of its 16 major counterparts as Chancellor of the Exchequer George Osborne said the data was 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 whether to extend the 375 billion-pound ($581 billion) asset-purchase program that tends to devalue a currency. U.K. government bonds fell as the gross-domestic-product report spurred demand for higher-yielding assets.

“The pound rebounded as the GDP surprise prompted some in the market to cover short sterling positions,” said Neil Jones, head of hedge-fund sales at Mizuho Corporate Bank Ltd. in London, referring to traders ending bets the currency would weaken. “The U.K. data isn’t blowing the doors off but with expectations being low and the market being short, there’s room for it to gain further.”

The pound advanced 1.6 percent this week to $1.5489 as of 5 p.m. in London yesterday, the biggest gain since the period ended April 20. The U.K. currency appreciated 1.8 percent over the five trading days to 84.11 pence per euro, snapping three weeks of losses.

The pound has strengthened 2.3 percent in the past month, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Sterling is still down 2.6 percent this year.

GDP Expands

U.K. gross domestic product grew 0.3 percent in the first quarter, the Office for National Statistics said on April 25. 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.

“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 that day.

The benchmark 10-year gilt yield rose two basis points, or 0.02 percentage point, this week to 1.68 percent. The 1.75 percent bond maturing in September 2022 declined 0.145, or 1.45 pounds per 1,000-pound face amount, to 100.615.

Gilts returned 1.3 percent this year through April 25, 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.

The U.K. Treasury will sell 500 million pounds of inflation-linked securities due in March 2062 on April 30 and a combined 2 billion pounds of bills on May 3.

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