Pound Rises to One-Month High After U.K. Trade Deficit Narrows

The pound reached the strongest level in a month against the dollar and euro after a government report showed the U.K. trade deficit narrowed in February.

Sterling has rallied 4.8 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, amid signs the economic recovery is gaining momentum. The International Monetary Fund raised its growth forecasts for the U.K. yesterday, predicting it will have the fastest expansion among developed nations this year. U.K. government bonds were little changed before the Bank of England announces its monetary policy decision tomorrow.

“While data has been mixed recently, the glass is more than half full in the case of sterling,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “But from a trading point of view, a lot of good news is already priced in. It will take something large for the pound to appreciate further, such as the Bank of England indicating it might have to raise rates sooner than the market thinks.”

The pound gained 0.1 percent to $1.6762 at 4:25 p.m. London time after advancing to $1.6765, the highest level since March 7. The U.K. currency fell 0.1 percent to 82.48 pence per euro after appreciating to 82.31 pence, the strongest since March 6.

Britain’s trade deficit narrowed to 9.09 billion pounds from 9.46 billion pounds in January, the Office for National Statistics said. A separate report from the British Retail Consortium-Nielsen showed prices of goods in shops dropped more in March than economists forecast.

Higher Forecasts

The IMF said in its World Economic Outlook that U.K. gross domestic product will expand 2.9 percent this year and 2.5 percent in 2015, compared with January forecasts of 2.4 percent and 2.2 percent. Still, it said the recovery remains uneven and the Bank of England should keep policy accommodative.

Implied volatility on three-month options for the pound-dollar currency pair dropped six basis points, or 0.06 percentage point, to 5.57 percent after declining to 5.51 percent on April 7, the lowest level since December 2012.

The benchmark 10-year gilt yield was at 2.69 percent after climbing three basis points yesterday. The price of the 2.25 percent bond maturing in September 2023 was 96.33.

Sell Gilts

Investors should sell 10-year gilts with a target of the yield increasing to 2.84 percent as the securities haven’t fully price in the economic recovery, Peter Schaffrik, head of European rates strategy at Royal Bank of Canada in London, wrote in an e-mailed note to clients.

The Office for National Statistics said yesterday industrial production rose 0.9 percent in February, surpassing the forecast of 0.3 percent in a Bloomberg survey of economists.

“The much stronger industrial production data are expected to lead to a round of upward revisions to GDP forecasts for the first quarter,” Schaffrik wrote. “We think it makes sense to position for a likelihood that 10-year yields retrace to the top of their range.”

The benchmark 10-year gilt yield has ranged from 2.64 percent to 2.84 percent since Jan. 24.

The Bank of England will keep its benchmark interest rate at record-low 0.5 percent tomorrow, according to all 50 economists surveyed by Bloomberg News. Policy makers will also leave asset-purchase target at 375 billion pounds, a separate survey showed.

Gilts returned 2.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries gained 2 percent and German bonds rose 2.5 percent.

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