Pound Pares Decline as Data Boost Outweighs U.S. Default Concern

The pound pared declines versus the euro as optimism the U.K. economy is growing outweighed concern that U.S. lawmakers will fail to agree on a debt-ceiling increase to avert the nation’s first-ever default.

Sterling was little changed against the dollar before the Bank of England’s next policy decision on Thursday, at which analysts forecast officials will keep interest rates and their asset-purchase stimulus target on hold. U.K. government bonds rose as the Debt Management Office sold 1.75 billion pounds ($2.82 billion) of inflation-linked securities.

“U.K. data are printing at or close to highs,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “There might be a case for sterling to weaken in the short term as people take off positions. Data-wise, we might see the momentum start to wane a little bit. There’s still a case for modest sterling appreciation.”

The U.K. currency fell 0.1 percent to 84.44 pence per euro at 4:47 p.m. London time after weakening to 84.69 pence. The pound was at $1.6090. It dropped to $1.6006 on Oct. 4, the lowest level since Sept. 26.

U.K. retail sales grew 0.7 percent in September, compared with a 1.8 percent increase the previous month, the British Retail Consortium said today. A separate report from the Royal Institution of Chartered Surveyors showed a house-price index rose to the highest since June 2002.

U.S. Shuttered

With the U.S. government shuttered in the past week following Congress’s failure to agree on a budget, lawmakers are deadlocked on how to end the federal closure and also on extending the nation’s debt ceiling before borrowing authority expires on Oct. 17.

The pound will strengthen to 83 pence per euro by the end of the year as the U.K. economy outperforms the euro region’s, Commerzbank’s Kinsella predicted. It will be little changed at 84 pence per euro, the median estimate of economists surveyed by Bloomberg shows.

“The pound is continuing to struggle against the dollar despite the recent stronger U.K. house-price data,” Morgan Stanley analysts led by head of global currency strategy Hans Redeker in London, wrote in a note to clients today. “The feed-through from house prices to the rest of the economy appears to be limited currently, with the retail sales data disappointing. We look to sell pound rebounds into the $1.6150 area.”

BOE Decision

Citigroup Inc.’s Economic Surprise Index for the U.K. fell to 49.60 on Oct. 3, the lowest since Aug. 1. The gauge, which shows whether data beat or fell short of economists’ forecasts, climbed to a nine-month high of 113.30 on Aug. 19. It was at 51.90 yesterday.

Sterling jumped 4.4 percent versus the dollar in September as the improving economic data prompted investors to increase bets the Bank of England will raise borrowing costs earlier than it has predicted. Policy makers led by Governor Mark Carney have said they will keep interest rates at a record low at least until unemployment falls to 7 percent, which they don’t see happening until late 2016.

The central bank will keep its benchmark rate at 0.5 percent and its asset-purchase stimulus target at 375 billion pounds when it announces its policy decision on Oct. 10, according to Bloomberg News surveys of analysts.

The benchmark 10-year gilt yield fell one basis point, or 0.01 percentage point, to 2.69 percent. The 2.25 percent bond due in September 2023 rose 0.12, or 1.20 pounds per 1,000-pound face amount, to 96.17.

The Debt Management Office sold the 0.125 percent inflation-linked securities at a real yield of minus 1.063 percent, compared with minus 0.887 percent at the last sale on Aug. 20. Investors bid for 2.77 times the number of securities allotted at the auction, up from 1.83 times in August.

Gilts lost of 2.8 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.7 percent and U.S. Treasuries declined 2.4 percent.

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