Bloomberg News

Pound Strengthens Against Euro After U.K. Construction Expands

July 02, 2013

The pound strengthened for the first time in five days against the euro after an industry report showed U.K. construction expanded in June, adding to signs Britain’s economy is gaining momentum.

Sterling rose from the lowest level in more than a month versus the shared currency after data yesterday showed manufacturing grew last month. Mark Carney began as governor of the Bank of England yesterday and will lead his first policy meeting this week. Carney must focus on boosting lending to help maintain the recovery, the British Chambers of Commerce said. U.K. gilts rose after the Debt Management Office sold 3.5 billion pounds ($5.31 billion) of 10-year securities.

“The data seems to be providing a little bit of a shield to a dip lower for now,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “There’s some nervousness before Carney’s first policy meeting this week so you won’t see any big shifts in the pound before that.”

The pound appreciated 0.1 percent to 85.79 pence per euro as of 12:25 p.m. London time after weakening 1.2 percent in the previous four days. Sterling slipped 0.2 percent to $1.5186 after falling to $1.5166 on June 28, the lowest since May 31.

An index of construction rose to 51 in June from 50.8 the previous month, Markit and the Chartered Institute of Purchasing and Supply said in London. Economists predicted 51.2, according to a Bloomberg survey. A reading above 50 signals expansion.

The pound has strengthened 4.1 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-market currencies. The euro gained 5.2 percent and the dollar climbed 3.4 percent.

Policy Meeting

Carney will lead his first meeting of the Monetary Policy Committee this week and all 44 economists in a Bloomberg News survey forecast the central bank’s bond-buying target will be kept at 375 billion pounds. The majority of the nine-member MPC have voted to keep the target unchanged since August.

Goldman Sachs Group Inc., among those predicting no change, said it is “more likely than not” the MPC will issue a statement after the meeting, something it typically doesn’t do.

“The recovery in the U.K. is gaining traction,” Anders Vestergaard Fischer, an analyst at Danske Bank A/S (DANSKE) in Copenhagen wrote in a report today. Carney’s arrival won’t change the balance of opinion among the policy makers immediately, he wrote, but the pound “is vulnerable to expectations of aggressive monetary policy. If MPC policy changes more than expectations it could be a trigger for renewed weakening.”

The British Chambers of Commerce said in a survey in London its measures of sales at manufacturers and service companies rose in the second quarter. Still, the report also showed declines in some investment gauges and “weak cashflow.”

Growth ‘Warning’

“They are a warning that economic growth could be slow, and a reminder that a sustained upturn cannot be taken for granted,” BCC Director General John Longworth said in a statement. “For these reasons, business access to finance, and working capital in particular, must be assured.”

The benchmark 10-year gilt yield fell four basis points to 2.38 percent. The 1.75 percent security maturing in September 2022 rose 0.315, or 3.15 pounds per 1,000-pound face amount, to 94.85. The rate on two-year gilts dropped two basis points to 0.36 percent.

The U.K. sold securities due in September 2023 at an average yield of 2.584 percent, the highest at an auction since September 2011 and up from 2.365 percent at a previous sale on June 11. That compares with a record-low 1.719 percent set at a sale on July 12, 2012.

Gilts handed investors a loss of 3.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.6 percent and Treasuries declined 2.8 percent, the indexes show.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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