The pound strengthened to the highest level in more than three-and-a-half years against the euro as a report showed U.K. manufacturing unexpectedly surged in May.
Yields on the 10-year gilt climbed the most in a week after the Office for National Statistics said factory output rose 1.2 percent from April versus economists’ forecast of a 0.1 percent drop. The pound fell versus the dollar after Bank of England Governor Mervyn King said he saw no “great signs” of a recovery. The central bank said on July 5 it would inject an extra 50 billion pounds ($77.7 billion) of so-called quantitative easing to boost the economy.
“The U.K. numbers were better than expected and that is providing sterling with some relief,” said Ankita Dudani, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in London. “Our economists believe there is still more QE to come. Today’s data doesn’t mean the economy is returning to growth.”
Sterling rose for a fifth day against the common currency, climbing 0.3 percent to 79.04 pence per euro at 4:54 p.m. London time. It touched 79 pence, the strongest level since November 2008. The pound fell 0.2 percent to $1.5502, after gaining to $1.5549.
The U.K. currency has advanced 4.3 percent in the past year, the third-best performer after the yen and dollar among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.
The Bank of England’s King said the pound’s appreciation on exports may further dent prospects for the U.K. economy.
“I am worried because sterling has risen over the past year -- that’s going to be a challenge -- and because of the state of the euro area,” King said in an interview broadcast on BBC Radio 4 today. “The economy has basically been flat for two years.”
The economy shrank for a third quarter in the three months through June as the first double-dip recession since the 1970s deepened, the National Institute of Economic and Social Research said today.
Sterling has support at $1.5469, the 61.8 percent Fibonacci retracement of its rally in June, as well as the July low at $1.5461, according to data compiled by Bloomberg.
Support refers to an area on a price graph where analysts anticipate orders to buy a security. Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low.
Ten-year gilt yields were little changed at 1.59 percent after rising to 1.61 percent. The 4 percent gilt due March 2022 fell 0.04, or 40 pence per 1,000-pound face amount, to 121.54.
U.K. government debt has returned 3.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds have handed investors a return of 3.6 percent, while Spanish bonds have lost 6.5 percent.
Gilts have benefited from haven flows as investors sought alternatives amid a deepening of the euro-area crisis. Demand for higher-rated European assets declined after euro-region leaders agreed to disburse 30 billion euros ($36.8 billion) by the end of July as part of a 100 billion-euro plan to strengthen Spain’s ailing banks.
“The Spanish agreement is a step in the right direction and the market took it positively,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “We still need details, but it’s enough to support risk appetite for now. That’s why bonds in the core market have lost their shine.”
The government sold 900 million pounds of inflation- protected bonds maturing in March 2050 to yield 0.11 percent. The difference in yields between 10-year gilts and index-linked securities narrowed three basis points to 241 basis points, the least since June 22.
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