Bloomberg News

Pound Reaches 2-Month High Versus Euro After Factory, Homes Data

September 02, 2013

The pound rose to the strongest level versus the euro in two months after an index of U.K. manufacturing expanded to the most since February 2011, adding to signs the economy is recovering.

Gilts fell, pushing 10-year yields to the highest in more than two years, as the gauge, based on a survey of purchasing managers, damped demand for the safety of government debt. Sterling rose for the first time in five days against the dollar before the Bank of England meets this week. The central bank will keep its asset-purchase program and benchmark interest rate unchanged, according to economists surveyed by Bloomberg, as policy makers assess the impact of forward guidance.

“The U.K. PMI is another piece of good news for the pound,” said Peter Frank, global head of currency strategy at Banco Bilbao Vizcaya Argentaria SA (BBVA) in London. “It’s another piece of evidence to suggest the recovery in the U.K. economy is broad-based. Almost every data set has been quite good over the past two months.”

The pound appreciated 0.5 percent to 84.76 pence per euro at 4:37 p.m. London time after reaching 84.72 pence, the strongest level since June 26. Sterling rose 0.2 percent to $1.5536.

The measure of manufacturing output rose to 57.2 in August from 54.8 a month earlier, Markit Economics and the Chartered Institute of Purchasing and Supply said today. The median estimate in a Bloomberg survey of economists was for a reading of 55. A reading above 50 indicates expansion.

Home Values

A separate report showed average house values in England and Wales rose 0.4 percent after a 0.3 percent gain in July, London-based property researcher Hometrack said. Prices were up 1.8 percent from a year earlier, the most since July 2010.

The Engineering Employers’ Federation raised its forecasts for U.K. economic growth and manufacturing output.

The Bank of England’s nine-member Monetary Policy Committee will keep its bond-buying stimulus program at 375 billion pounds on Sept. 5, according to all 38 economists in a Bloomberg survey. Officials will also hold the main interest rate at a record-low 0.5 percent, a separate survey showed.

The pound’s advance took it beyond its 200-day moving average at 84.81 pence euro for the first time since December, data compiled by Bloomberg show.

Sterling gained versus the dollar as Verizon Communications Inc. said it is is poised to announce an agreement as soon as today to acquire Vodafone Group Plc (VOD)’s 45 percent stake in their wireless venture for $130 billion, capping its decade-long pursuit of full control of the biggest U.S. mobile-phone company.

Verizon Deal

The price will be paid in a combination of cash and Verizon’s stock, Newbury, England-based Vodafone said in a statement, describing the talks as “advanced.”

Sterling strengthened 6.5 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.2 percent and the dollar climbed 2.7 percent.

Benchmark 10-year gilt yields climbed seven basis points, or 0.07 percentage point, to 2.85 percent after reaching 2.87 percent, the highest since Aug. 1, 2011. The 2.25 percent bond maturing in September 2023 fell 0.61, or 6.10 pounds per 1,000-pound face amount, to 94.85.

Yields on 10-year gilts have risen about 40 basis points since Bank of England Governor Mark Carney introduced forward guidance last month. Carney said Aug. 7 the MPC won’t consider raising its key rate until unemployment falls to 7 percent, something it doesn’t see happening until the end of 2016.

Yields Climb

Investors have indicated skepticism about that projection and added to bets on an increase before then, prompting Carney to say officials are ready to add stimulus if expectations for higher rates hurt the recovery.

The implied yield on the short-sterling contract expiring in September 2016 rose nine basis points to 2.18 percent, from as low as 1.53 percent on Aug. 1.

“We think it is unlikely that the BOE will be able to hold off on an interest-rate hike until the late 2016 date that Mark Carney has signaled,” Rob Wood, chief U.K. economist at Berenberg Bank in London wrote in a note to clients. “The economy appears to be running way ahead” of the central bank’s growth forecast, “which should strengthen the view of those MPC members that thought a first rate hike in late 2015 would be reasonable,” Wood wrote.

The Office for National Statistics said on Aug. 23 the U.K. economy expanded 0.7 percent in the second quarter. That compared with an initial estimate of 0.6 percent published on July 25.

Gilts lost 3.7 percent this year through Aug. 30, according to Bloomberg World Bond Indexes. German bonds dropped 2.2 percent and Treasuries declined 3.3 percent.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

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


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