U.K. Pound Gains After Construction Output Expands; Gilts Rise

The pound strengthened the most in more than a week versus the dollar after a report showed U.K. construction output accelerated in October to the fastest pace in six years, adding to evidence the recovery is gathering pace.

Sterling snapped three days of gains versus the euro, after climbing last week amid speculation the European Central Bank will cut interest rates to revive growth. Britain’s currency last week slid the most versus the dollar since July as signs the U.S. economy is improving fueled bets the Federal Reserve will begin tapering stimulus that tends to weaken the greenback. U.K. government bonds rose for the first time in three days.

“The data is suggesting that the economy is about as good as it can get,” said Gavin Friend, a currency strategist at National Australia Bank Ltd. in London. “The U.K. is looking better than Europe and the U.S. There’s not much further it can go. We should see a renewed downward focus on the euro against sterling because people are starting to think about the growth divergence.”

The pound appreciated 0.2 percent to $1.5955 at 4:41 p.m. London time, after declining 1.5 percent last week, the steepest drop since the period ended July 5. Sterling was little changed at 84.74 pence per euro. It climbed 0.8 percent last week, the biggest gain since Sept. 27.

Growth Accelerated

An index of construction activity, based on a survey of purchasing managers, rose to 59.4 in October from 58.9 in September, Markit Economics said today in London. The median forecast of 15 economists was for a decline to 58.7. The gauge has been above the 50 level that divides expansion from contraction since May.

U.K economic growth accelerated to the fastest in more than three years in the third quarter as the recovery continued across all main industries. The Confederation of British Industry raised its forecasts for the economy yesterday and now sees expansion of 1.4 percent this year and 2.4 percent in 2014. That’s up from 1.2 percent and 2.3 percent in August.

The pound gained 0.8 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 2.9 percent and the euro climbed 5.7 percent.

Bank of England policy makers meeting on Nov. 7 will leave the key interest rate at 0.5 percent and the asset-purchase target at 375 billion pounds, according to Bloomberg surveys of economists.

The ECB will announce a cut in its main refinancing rate to a record-low 0.25 percent on Thursday, according to Bank of America Corp., UBS AG and Royal Bank of Scotland Group Plc. Theirs were among 68 analyst estimates compiled by Bloomberg News. The remainder expect the rate to remain at 0.5 percent.

Diverging Outlook

“The diverging cyclical outlook for the ECB and the BOE should continue to weigh on” the euro versus the pound, Valentin Marinov, head of European Group-of-10 foreign-exchange strategy at Citigroup Inc. in London wrote in a note to clients. “We think that sterling could regain more ground against the euro.”

While Citigroup forecasts the ECB will leave its key rate unchanged, it sees a risk of more policy measures as soon as December, Marinov wrote.

The U.K. 10-year gilt yield fell two basis points, or 0.02 percentage point, to 2.63 percent. The rate declined to 2.52 percent on Oct. 31, the lowest since Aug. 13. The 2.25 percent bond due in September 2023 rose 0.175, or 1.75 pounds per 1,000-pound face amount, to 96.755.

The U.K. debt management office plans to sell 1.25 billion pounds of 0.25 percent inflation-linked bonds due in March 2052 at an auction tomorrow.

Ultra-Long Linker

“This auction size is very large for an ultra-long linker,” Henry Skeoch, a strategist at Barclays Plc in London wrote in a note to clients. “We think that some additional concession pre-supply is possible, though we expect the auction itself to be fairly well received.”

The yield on inflation-linked bonds maturing in March 2052 was little changed at 0.02 percent. The rate was as low as minus 0.04 percent on Oct. 23.

The Debt Management Office needs to sell 9.3 billion pounds of inflation-linked bonds at auctions and 4.1 billion pounds through banks before the end of the fiscal year on March 31 to meet its planned issuance, Skeoch wrote.

U.K. government bonds lost 2.5 percent this year through Nov. 1, according to Bloomberg World Bond Indexes. Treasuries slid 2.2 percent and German bonds declined 1 percent.

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