Pound Climbs to Two-Week High as U.K. Factory Output Rebounds

  • Industrial production overshoots most optimistic forecast
  • Sterling posts biggest daily gain versus euro in two weeks

The pound rose to a two-week high versus the dollar after growth in U.K. industrial production beat the highest forecast in a Bloomberg survey of economists.

Sterling strengthened against all but two of its Group-of-10 peers after data showed total production was boosted in August by increases in gas extraction and making transport equipment. The pound posted its biggest daily gain in more than two weeks versus the euro as the U.K. data contrasted with the situation in Germany, where a report showed industrial output unexpectedly dropped as the nation grappled with China’s slowdown. Britain’s government bonds fell for a third day.

“Recent U.K. economic data have proven a tad disappointing, however on a relative basis to global performance, we sense the U.K. is set to outperform,” Neil Jones, London-based head of hedge-fund sales at Mizuho Bank Ltd., said in an e-mail. “Today’s industrial-production data is more encouraging. Add into the mix that the market is far from crowded in terms of long positions” and “we have a higher pound today.”

Sterling rose 0.6 percent to $1.5312 as of 4:30 p.m. London time, after touching $1.5328, the highest since Sept. 23. It strengthened 0.7 percent to 73.55 pence to the euro. A long position on a currency means betting it will climb.

Yields Rise

Benchmark 10-year gilt yields climbed two basis points, or 0.02 percentage point, to 1.82 percent, extending their advance this week to 11 basis points. The 2 percent bond due in September 2025 slipped 0.19, or 1.90 pounds per 1,000-pound face amount, to 101.64.

Total U.K. industrial production increased 1 percent from July, the Office for National Statistics said in London on Wednesday. An increase of 0.3 percent was expected by economists in a Bloomberg survey, with the highest forecast at 0.9 percent.

Factory output is the last set of data before BOE Governor Mark Carney and his fellow policy makers publish their latest assessment of Britain’s economy Thursday, as well as their decisions on interest rates and asset purchases. Other economic indicators have been disappointing recently, with a report earlier this week showing services grew at the weakest pace in more than two years.

BOE Stance

That’s made investors skeptical of the BOE’s determination to tighten monetary policy early next year. Forward contracts based on the sterling overnight index average, or Sonia, suggest that a full quarter-point increase to the U.K.’s 0.5 percent official rate won’t come until after November 2016.

“The BOE’s stance of indicating a rate rise early next year is probably going to remain in place” on Thursday, said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “Given the extent to which markets have pushed back rate expectations, this could prove supportive for sterling as it’s highly sensitive to changes in rate expectations.”

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