Pound Set for Biggest Weekly Gain Since June on Recovery Signs

By Lukanyo Mnyanda

Oct. 16 (Bloomberg) -- The pound strengthened against the euro and headed for its biggest weekly gain in more than four months on speculation the economy is showing sufficient signs of recovery for policy makers to pause asset purchases.

Sterling also traded near a two-week high against the dollar as the FTSE 100 Index of stocks headed for a second week of gains. Data next week may show the U.K. economy emerged from recession in the third quarter and retail sales rose in September, according to Bloomberg surveys of economists.

“If we see more encouraging data, sterling can benefit further,” said Roberto Mialich, a senior global currency strategist in Milan at UniCredit SpA. “We don’t think more quantitative easing is a done deal.”

The U.K. currency strengthened 0.5 percent to 91.38 pence per euro as of 9:15 a.m. in London, adding to a 1.7 percent gain yesterday. Sterling advanced 1.7 percent since Oct. 9, set for its biggest weekly rise since the period through June 12. That pushed its gain in the past week to 2.9 percent.

Policy makers are unlikely to stop purchases and would rather pause and give themselves the option of “doing more later,” the Financial Times cited Bank of England Markets Director Paul Fisher yesterday as saying.

The short-sterling interest-rate futures contract expiring in March 2010 increased 4 basis point to 0.88 percent, signaling some investors are adding to bets policy makers will increase interest rates. The rate has risen from 0.78 percent on Sept. 28, the lowest level this year.

The Bank of England’s main interest rate is at 0.5 percent, an all-time low. The central bank is buying 175 billion pounds ($285 billion) of assets in an attempt to further depress borrowing costs.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net