Pound Rises to One-Month High Versus Euro as U.K. Services Surge

Updated on
  • Sterling touches highest level versus dollar in seven weeks
  • Gilts pare gains after data cast doubt on BOE stimulus bets

Caution Urged for Investors as Data Pushes Pound Higher

The pound touched its strongest level in more than a month versus the euro as services became the latest part of the economy to show a bounce back after the Britain’s vote to leave the European Union.

Sterling rose earlier to its highest in seven weeks against the dollar as a report showed a gauge of U.K. services increased the most on record in August. The pound has climbed versus all except one of its 31 major counterparts in the past week after a series of reports showed the initial disruption from the June 23 referendum may not be as severe as some economists predicted.

“The data is suggesting that early signs are encouraging, and it’s not been the economic fallout that some were suggesting, and that’s creating cutbacks in short-sterling positions,” said Neil Jones, London-based head of hedge-fund sales at Mizuho Bank Ltd., referring to bets that profit from a weaker pound. “It’s a continuation of the solid data that’s been surprising to the upside.”

The pound gained 0.1 percent to 83.81 pence per euro as of 4:16 p.m. London time, after reaching 83.52 pence, the strongest level since Aug. 4. Sterling was little changed at $1.3301, having climbed earlier to $1.3376, the highest since July 15.

While the U.K. currency’s almost 11 percent drop versus the dollar since the day of the EU referendum is still the worst performance among major peers, hedge funds and other large speculators last week reduced their net short positions for the first time since early July.

Services Expand

IHS Markit said its Purchasing Managers Index climbed to 52.9 from a seven-year low of 47.4 in July, the biggest monthly gain since the survey began two decades ago. The median estimate of economists in a Bloomberg survey was for a reading of 50, the level that divides expansion from contraction.

Markit predicted “an imminent recession will be avoided” but urged caution, saying data since the June Brexit referendum point to stagnation so far this quarter and many firms remain concerned about the outlook.

The report came after sentiment toward the pound was bolstered last week by data showing a rebound in construction, manufacturing output and higher household confidence. A stronger-than-estimated recovery may ease speculation the Bank of England will unleash further stimulus this year, which tends to debase the currency and boost demand for government bonds. Ten-year gilts pared gains after the report.

Benchmark 10-year gilt yields fell two basis points, or 0.02 percentage point, to 0.71 percent, after touching 0.69 percent. The 1.5 percent bond due in September 2026 rose 0.175, or 1.75 pounds per 1,000-pound face amount, to 107.53. The yield has risen from a record-low 0.501 percent set on Aug. 15.

“The recent string of positive U.K data surprises, particularly from PMI survey data, has collided with a market that was and remains highly bearish sterling,” Alvin T. Tan, a London-based foreign-exchange strategist at Societe Generale SA, wrote in a client note. “The resulting squeeze has propelled sterling up strongly over the past week.”