Pound Bulls Disregard U.K. Output Slump

The pound was little changed against the euro as investors overlooked a slump in U.K. manufacturing.

Sterling erased an intraday drop to trade within 0.4 percent of its strongest level in almost two years against the 18-nation shared currency. The pound has outperformed all its 16 major peers in the past 12 months as economic growth strengthened and the National Institute of Economic and Social Research said today the U.K. economy expanded at a faster pace in the three months through June. Britain’s government bonds advanced as the Debt Management Office held its first auction in more than two years of securities due in 2060.

“It’s an unfortunate blip,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, said of the production data. “I would be surprised if it’s a definitive trend change. We will see a continued trend lower in euro-sterling as we head through the year.”

The pound traded at 79.45 pence per euro at 5:40 p.m. London time after weakening as much as 0.2 percent. It touched 79.15 pence yesterday, the strongest level since September 2012. The U.K. currency was little changed at $1.7133 after climbing to $1.7180 on July 4, the highest since 2008.

Sterling earlier declined as much as 0.3 percent versus the dollar after a report showed factory output fell 1.3 percent in May from the previous month, the biggest drop since January 2013. The median forecast of 25 economists in a Bloomberg News survey was for a 0.4 percent increase.

Gilts Auction

The U.K. currency rose 11 percent in the past 12 months, the best performance among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes, as investors bet buoyant economic growth would make the Bank of England the first major central bank to end extraordinary stimulus measures. The euro climbed 1.7 percent and the dollar declined 4.4 percent.

“We doubt that the latest disappointing data heralds the beginning of sustained growth deceleration in the U.K.,” Valentin Marinov, the head of European Group-of-10 currency strategy at Citigroup Inc., wrote in an e-mailed note today. “Recent sentiment indicators seem to suggest that the recovery remains very robust. We remain bullish.”

Citigroup predicts the pound will advance 3.3 percent to $1.77 by the end of 2014 and reach 77 pence per euro. The bank is the biggest foreign-exchange trader, based on a Euromoney Institutional Investor Plc survey published in May.

The median year-end estimates of analysts surveyed by Bloomberg are for the U.K. currency to weaken to $1.68 and strengthen to 78 pence per euro.

Rate Predictions

While all 47 economists surveyed by Bloomberg predict the U.K. central bank will leave its benchmark rate at a record-low 0.5 percent on July 10, forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting it will increase 25 basis points by February.

The first vote for an increase in rates by a member of the Monetary Policy Committee may come as early as August, according to Goldman Sachs Group Inc. and Berenberg Bank. BOE officials last raised borrowing costs in July 2007.

Britain’s economy grew 0.9 percent in the second quarter. That compares with a 0.7 percent expansion in the three months through May, it said.

The DMO sold 1.75 billion pounds of 2060 gilts today at an average yield of 3.367 percent. Investors bid for 1.83 times the securities on offer.

Benchmark 10-year gilt yields fell eight basis points, or 0.08 percentage point, to 2.65 percent. The 2.25 percent bond maturing September 2023 rose 0.63, or 6.30 pounds per 1,000-pound face amount, to 96.79. The rate on 30-year securities declined four basis points to 3.40 percent.

Gilts returned 3.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities earned 4.8 percent and Treasuries gained 2.8 percent.

Before it's here, it's on the Bloomberg Terminal.