Pound Rises to Three-Month High Versus Euro on Surge in Services

The pound strengthened to the highest in more than three months against the euro as a report showed U.K. services expanded at the fastest pace since 2006, boosting demand for Britain’s currency.

Sterling climbed for a third day against the dollar after Markit Economics and the Chartered Institute of Purchasing and Supply said their U.K. services index, based on a survey of purchasing managers, rose to 60.5 last month from 60.2 in July as a gauge of new business rose to the highest in more than 16 years. U.K. government bonds were little changed as Bank of England policy makers began a two-day meeting today.

“The improvement in data in recent weeks has helped to support sterling as it has forced some to reduce their short positions,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London, referring to bets the pound will weaken. “While we remain relatively bearish on sterling because of the country’s weak external position, positive data headlines will probably underpin the pound in the near term.”

The pound climbed 0.3 percent to 84.45 pence per euro at 4:20 p.m. London time after reaching 84.27 pence, the strongest level since May 16. Sterling rose 0.5 percent to $1.5640.

The pound will drop to $1.50 by the end of this year, according to the median of 75 estimates compiled by Bloomberg News. A separate forecast sees the currency weaken to 85 pence per euro.

Services Expand

The services data beat the median forecast of 26 analysts, which called for a decline to 59.7. The U.K. economic recovery that started in the second quarter is gaining momentum, with Markit’s reports on manufacturing and construction also showing faster expansion in August.

“The forward-looking components -- new orders, business expectations -- were uniformly stronger and suggest that growth momentum in the U.K. can be sustained for now,” Jens Larsen, chief European economist at RBC Capital Markets in London, wrote in an e-mailed note.

The pound strengthened 6.3 percent over the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 3.9 percent and the dollar climbed 2.4 percent.

Goldman Sachs Group Inc. said today it closed a trade that bought the euro versus sterling with a potential loss of 0.2 percent, citing positive U.K. data.

The Bank of England’s nine-member Monetary Policy Committee will keep its asset-purchase target at 375 billion pounds tomorrow, according to all 38 economists in a Bloomberg survey. Officials will hold the main interest rate at a record-low 0.5 percent, a separate survey shows.

Forward Guidance

Under the central bank’s forward guidance, the MPC plans to keep its key interest rate on hold as long as unemployment exceeds 7 percent. The jobless rate was at 7.8 percent, according to data on Aug. 14.

The premium for three-month options granting the right to sell the pound versus the dollar relative to those giving the right to buy dropped 20 basis points, or 0.20 percentage point, to 1.27 percentage points. The premium reached 1.64 percentage points on July 5, the most since July 2012.

Ten-year gilts yielded 2.87 percent. They reached 2.90 percent yesterday, the highest level since Aug. 1, 2011. The price of the 2.25 percent bond due September 2023 was at 94.63.

U.K. government bonds were the worst performers in European markets this year through yesterday after bonds from Sweden and Denmark, according to Bloomberg World Bond Indexes. Gilts lost 4.15 percent, the indexes showed, while Swedish and Danish securities dropped 4.24 and 4.66 percent respectively. German bonds declined 2.6 percent and Treasuries lost 3.6 percent.

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