Pound Climbs as Accelerating Growth Counters `Brexit' Concern

  • British economy expanded 0.5% in 4th quarter, report shows
  • Futures indicate no rate increase until after March 2017

The pound rose the most in seven weeks after a report showed the U.K.’s economic expansion accelerated in the fourth quarter.

Sterling’s gain versus the dollar reversed a decline Wednesday which was the biggest in almost two weeks. Britain’s economy grew 0.5 percent in the final three months of 2015, compared with 0.4 percent in the third quarter, and matching the median forecast of analysts surveyed by Bloomberg.

The pound still headed for its third monthly decline versus the U.S. currency, having slumped to an almost seven-year low last week, weighed down by whipsawing financial markets and concern that the U.K. will vote to exit the European Union.

“Gross domestic product wasn’t as weak as it could have been,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “Given the way the market is trading, a lot of people thought the same. I’d want to be selling into the rally though, given the ongoing headwinds.”

The pound rose 1.1 percent to $1.4390 at 4:13 p.m. London time, the biggest gain since Dec. 9, paring its monthly decline to 2.3 percent. The U.K. currency fell to $1.4080 on Jan. 21, the lowest since March 2009. Sterling gained 0.7 percent to 76.03 pence per euro, having weakened 1 percent a day earlier.

Rate Outlook

The outlook for U.K. interest rates remains muted, with Bank of England Governor Mark Carney telling lawmakers in London on Jan. 26 that “we will have to see the renewal of growth above trend, we’ll have to see unit labor costs pick up, and we’ll have to see a continued firming of core inflation” before tightening policy.

Forward contracts based on the sterling overnight index average, or Sonia, show traders aren’t fully pricing in a quarter-point increase to the BOE’s 0.5 percent official bank rate until after March 2017.

U.K. government bonds advanced for the first time in three days, with the 10-year yield falling four basis points, or 0.04 percentage point, to 1.68 percent. The 2 percent gilt due in September 2025 rose 0.315, or 3.15 pounds per 1,000-pound face amount, to 102.87. The additional yield investors demand to hold similar-maturity U.S. Treasuries over gilts increased to 33 basis points.

“Concerns over China and global growth have led to quite extreme conditions in the U.K. rates market,” Adrian Owens, a London-based money manager at GAM (U.K.) Ltd., which has about $123 billion in assets, wrote in an e-mailed comment. “The market is not pricing in enough of rate hikes in the U.K. On the long end, 10-year gilts are looking very rich compared to Treasuries.”

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