Pound Wins in Second Half of 2013 on U.K. Economic Recovery

The pound was the strongest performer among a gauge of 10 developed-nation currencies in the second half of 2013 as improved economic data boosted bets the Bank of England will tighten monetary policy.

Sterling matched the highest level in more than two years versus the dollar yesterday after third-quarter growth came in at the fastest since 2010, spurring trader speculation the BOE will raise interest rates earlier than its 2016 forecast. The pound’s gains countered its biggest quarterly drop since 2008 in the three months through March amid concern the economy was headed for an unprecedented triple-dip recession.

“The turning point for the pound was the economic data,” said Kathleen Brooks, European research director at Forex.Com in London in a Dec. 23 interview. “U.K. data surprised to the upside for most of the third quarter and parts of the fourth. It can be a very powerful driver when the market believes the Bank of England has got it wrong and is maybe behind the curve.”

The pound traded at $1.6578 at 4:51 p.m. London time yesterday, matching the highest level on Dec. 27, which was the strongest since August 2011. Sterling tumbled to as low as $1.4814 on July 9, the least since June 2010. The pound traded at 83.11 pence per euro after appreciating 3.3 percent in the past six months versus the shared currency.

Rates Pledge

Central bank Governor Mark Carney, who took up his post in July, pledged in August to keep the main interest rate at 0.5 percent at least until U.K. unemployment falls to 7 percent, subject to caveats on inflation and financial stability.

The Bank of England raised its forecasts last month and said the recovery had “taken hold” after the economy expanded 0.8 percent in the third quarter. The U.K. returned to growth in the first three months of the year after shrinking in the final two quarters of 2012.

Unemployment unexpectedly fell in the three months through October to the lowest in more than four years, approaching the BOE’s 7 percent threshold. That came after Citigroup Inc’s U.K. economic surprise index rose to 113.30 on Aug. 19, the highest level since October 2012.

The Monetary Policy Committee voted 9-0 to keep stimulus on hold, minutes of its Dec. 4-5 meeting showed. The MPC said that while sterling’s strength may help ease inflation pressures, it could also impede growth in an environment of weak global demand.

Sterling rose 6.8 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes. The euro rose 3.4 percent and the dollar dropped 3 percent. The pound dropped 6.5 percent versus the dollar in the first quarter, the worst performance since the final three months of 2008.

Decline Forecast

The pound will decline against the dollar and appreciate versus the euro next year, according to surveys by Bloomberg News. It will drop to $1.59 by the end of 2014, according to the median estimate of analysts. Sterling will strengthen to 81 pence versus the euro, another survey showed.

U.K. rates may need to rise as soon as next year, according to interest-rate futures. The implied yield on short-sterling futures expiring in December 2014, a gauge of where traders think three-month interbank borrowing costs will be, was at 0.925 percent.

Yields on U.K. benchmark 10-year gilts were at 3.02 percent after touching 3.08 percent on Dec. 27, the highest level since July 2011. That’s up from 1.83 percent on Dec. 31, 2012.

Gilt yields rose this year with Treasuries as signs of a strengthening U.K. recovery were mirrored in the U.S. and as speculation the Federal Reserve would slow its bond-buying stimulus program damped demand for fixed-income assets. The Fed decided to trim its monthly purchases by $10 billion to $75 billion on Dec. 18.

“On the current trajectory it still looks most likely that the Bank of England may be the first major central bank to begin raising policy rates,” Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ in London, said in a Dec. 23 interview. “As a result, yield spreads should continue to move in favor of the pound.”

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