Pound Set for Third Weekly Gain as U.K.’s Budget Deficit Narrows

The pound was set for a third weekly advance versus the dollar after a government report showed the U.K.’s budget deficit narrowed in August.

Sterling was 0.8 percent from the strongest level in eight months against the U.S. currency after the Federal Reserve this week unexpectedly refrained from slowing the pace of bond-buying under its quantitative-easing program that tends to debase the currency. The currency headed for its first weekly loss in a month against the euro before a report economists said will show consumer confidence improved in the 17-nation currency bloc. U.K. gilts were little changed.

“We can extend higher in sterling in this broad risk-positive environment,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “However, I would be a bit cautious in the near-term as the move has gone quite a long way. It could be due for a bit of a correction.”

The pound was little changed at $1.6033 as of 10:58 a.m. London time after climbing to $1.6163 on Sept. 18, the highest level since Jan. 11. It has gained 1 percent this week. The U.K. currency appreciated 0.1 percent to 84.35 pence per euro after reaching 83.53 pence on Sept. 18, the strongest since Jan. 17. Sterling has weakened 0.7 percent against the shared currency this week.

The U.K.’s net borrowing excluding temporary support for banks was 13.2 billion pounds last month compared with 14.4 billion pounds a year earlier, the Office for National Statistics said today. The median estimate of 19 analysts in a Bloomberg News survey was for a deficit of 13.3 billion pounds.

Recovery Evidence

Sterling has risen 5.8 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4 percent and the dollar weakened 1 percent.

U.S. policy makers said this week they want more evidence of a recovery before paring their $85 billion-a-month quantitative-easing program. Chairman Ben. S. Bernanke said the central bank must determine its policies based on “what’s needed for the economy,” even if it surprises markets.

Bank of England minutes published on Sept. 18 showed its nine-member Monetary Policy Committee voted unanimously to keep its bond-purchase stimulus program at 375 billion pounds and the benchmark interest rate at a record-low 0.5 percent.

An index of household confidence in the euro area climbed to minus 14.5 in September, the most since July 2011, from minus 15.6 in August, according to a Bloomberg survey of analysts before today’s European Commission report.

The benchmark 10-year gilt yield was at 2.90 percent. The price of the 2.25 percent bond maturing in September 2023 was 94.40.

U.K. government bonds lost 4.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities dropped 2.3 percent and Treasuries fell 3 percent.

Before it's here, it's on the Bloomberg Terminal.