Pound Jumps Most in a Month as Retail Sales Increase; Gilts Fall

The pound jumped the most in a month against the dollar after a government report showed U.K. retail sales increased more in December than economists forecast.

Sterling advanced versus all of its 16 major peers before a job report next week that analysts said will show unemployment fell toward the Bank of England’s threshold for reviewing when to start raising interest rates. The strength in the pound reflects relative U.K. growth, Bank of England Monetary Policy Committee member Ben Broadbent said. U.K. government bonds fell, with 10-year yields rising from the lowest level in six weeks.

“This is a strong economy and there will be buyers of sterling,” said Gavin Friend, a foreign-exchange strategist at National Australia Bank Ltd. in London. “It’s a whopping number for December, the strongest on record. Despite the magnitude of the data, we estimate this will only add 0.2 percent” to gross domestic product for the fourth quarter, he said.

The pound rose 0.6 percent to $1.6447 at 4:27 p.m. in London, the biggest gain since Dec. 18. The U.K. currency climbed 1 percent to 82.48 pence per euro after appreciating to 82.31 pence on Jan. 9, the strongest since January 2013.

Sterling has appreciated 8.2 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 2.9 percent, while the dollar dropped 0.8 percent.

Retail sales including fuel increased 2.6 percent from November, the Office for National Statistics said, the strongest December since records began in 1996. Economists surveyed by Bloomberg predicted a gain of 0.3 percent.

‘Major Surprise’

The result was “a major surprise,” Neil Jones, head of European hedge-fund sales at Mizuho Bank Ltd. in London, wrote in a note to clients. “I would expect only limited gains from here. However, improved domestic confidence expectations is a key pillar behind our long-term bullish sterling forecast.”

The jobless rate fell to 7.3 percent in the three months through November, from 7.4 percent in the quarter through October, according to a Bloomberg survey before the data is released on Jan. 22. Bank of England Governor Mark Carney said in August policy makers wouldn’t consider raising the key interest rate at least until unemployment dropped to 7 percent.

More than 60 percent of respondents to a Bloomberg monthly survey predict Carney will refine forward guidance when the central bank publishes its quarterly Inflation Report on Feb. 12. Almost a third said the jobless rate will fall to 7 percent in the first half of 2014.

‘Not Recovering’

Sterling’s strength “is a reflection of the fact that the rest of the world is not recovering”, Broadbent said today after a speech in London. “What I’d like to see, more fundamentally, is the euro zone start to grow.”

The pound will weaken 3.3 percent to $1.59 by year-end, according to the median estimate of 70 economists and strategists surveyed by Bloomberg News. It will strengthen 1.8 percent to 81 pence per euro, a separate survey predicts.

The yield on the benchmark 10-year gilt climbed two basis points, or 0.02 percentage point, to 2.83 percent after falling to 2.80 percent, the lowest level since Dec. 2. The 2.25 percent bond due in September 2023 dropped 0.165, or 1.65 pounds per 1,000-pound face amount, to 95.13.

Gilts handed investors a loss of 2 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. Treasuries declined 2.4 percent and German securities dropped less than 0.1 percent.

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