Pound Gains Most in Two Weeks Versus Euro as King Sees Recovery

The pound strengthened the most in two weeks against the euro after the Bank of England upgraded its estimate of the U.K. economy and Governor Mervyn King said a recovery was now “in sight.”

Sterling advanced against all except one of its 16 major counterparts after the central bank’s quarterly Inflation Report predicted growth may quicken to 0.5 percent this quarter from 0.3 percent during the previous three months. The pound also rallied after a report showed U.K. jobless claims declined in April even as unemployment increased. Government bonds fell, pushing yields to the highest level in two months.

“The pound is reacting to the headlines on slightly higher growth and lower inflation forecasts from the Bank of England,” said Gavin Friend, a currency strategist at National Australia Bank Ltd. in London. “It fits with the run of U.K. data we’ve had recently. There’s a sense that some of the worst is over, but the economy is still flatlining.”

The pound advanced 0.5 percent to 84.53 pence per euro at 4:20 p.m. London time after gaining as much as 0.7 percent, the most since May 2. Sterling was little changed at $1.5211 after appreciating as much as 0.4 percent.

The Bank of England increased its growth projections for the next three years in its Inflation Report and predicted inflation will peak at 3.1 percent in the third quarter, lower than expected in February.

‘Welcome Change’

“There is a welcome change in the economic outlook,” King said at a press conference in London, his last before retiring as central bank governor. “We don’t see a particularly rapid recovery in the next few quarters but we do see a recovery and I think there are good reasons for that.”

Jobless claims fell 7,300 in April from the previous month, when they dropped 7,000, the Office for National Statistics said in London. Unemployment as measured by International Labour Organisation methods rose 15,000 in the first quarter to 2.52 million, a rate of 7.8 percent.

The pound has appreciated 1.7 percent in the past month, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar advanced 2.2 percent and the euro appreciated 0.7 percent.

Gilts Decline

The 10-year gilt yield climbed two basis points, or 0.02 percentage point, to 1.92 percent after rising to 1.95 percent, the highest level since March 15. The 1.75 percent bond maturing in September 2022 fell 0.135, or 1.35 pounds per 1,000 pound face amount, to 98.60.

“The inflation report wasn’t particularly constructive from a gilt perspective,” said Jason Simpson, a strategist at Banco Santander SA in London. “The message is that things are recovering. It was pretty much as we expected but it left a few people in the gilt market a little disappointed. It’s not a big departure from what we’ve seen before.”

Banco Santander forecasts the 10-year yield will climb to 2.75 percent by year-end, Simpson said. The rate will increase to 2.18 percent, according to a Bloomberg survey of economists with the latest estimates given the heaviest weighting.

The 10-year break-even rate, a gauge of inflation expectations derived from the difference between yields on conventional gilts and index-linked securities, fell one basis point to 3.17 percentage points.

The Debt Management Office will sell as much as 2.5 billion pounds of 30-year bonds tomorrow.

Gilts handed investors a loss of 1.7 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds fell 0.9 percent and Treasuries slid 1.3 percent.

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