LONDON: Sterling soared to a 14-month high against a trade-weighted basket of currencies and an 11-month peak against the dollar on Wednesday after a report suggested the UK economic recovery was broadening gradually.
The UK's gross domestic product grew 0.8 percent in the third quarter from the second, its fastest expansion in more than three years. Year-on-year, it grew 1.5 percent, according to the Office for National Statistics.
Sterling initially dipped, because some speculators and algorithmic traders had positioned for a 0.9 percent quarter-on-quarter reading.
"That did not happen, so some long positions got squeezed," said a London based spot trader, referring to the dip in sterling towards $1.62 immediately after the GDP data. "Real- money investors emerged at lower levels and bought sterling/yen and sterling/Swiss franc, all of which helped the pound rally."
Activity in sterling/dollar was 70 percent above the one- month average on the Reuters matching platform. The pound rose to $1.6328, its highest since early January, breaking through a reported option barrier at $1.6300 after triggering stop-loss buy orders on the break above $1.6260.
It was trading at $1.6235 before the GDP data was released.
Sterling hit a fresh five-year high against the yen at 166.13 yen, and rose 0.4 percent against the Swiss franc to 1.4758 francs. The gains helped drive a sterling trade-weighted index to a 14-month high.
"The GDP data shows that a gradual recovery is taking place, and in the short term at least we can look forward to some more good data," said Alex Edwards, head of corporate sales at UKForex. "That could see sterling rise to $1.63 and set a new trading range."
The euro also fell against sterling. The single currency was trading at 83.375 pence, down 0.4 percent on the day. The euro was at 87.76 pence before the data was released.
The pound was expected to face resistance at 83.33 pence - equivalent to 1.20 euros per pound and a level at which UK importers often look to sell the UK currency - as well as at the early November peak of 83.00 pence.
Euro underperformance compared with the pound reflects diverging monetary policy outlooks. The European Central Bank is expected to loosen monetary policy to ward off disinflation in the economy. Meanwhile, markets are pricing in a rate hike in the UK in two years time.
Those expectations remained intact even though Bank of England Governor Mark Carney reiterated in testimony before UK lawmakers on Tuesday that interest rates would not necessarily rise even if unemployment falls to 7 percent.
The spread between 10-year British and German government bonds widened to 106 basis points, after climbing to an eight-year high of 109.4 basis points last week.
Month-end rebalancing flows helped sterling as well, traders said. And with volumes expect to wane going into the U.S. Thanksgiving holiday on Thursday, intra-day volatility in currencies could pick up.
"I still like sterling and the data has been very supportive fundamentally," said Ian Gunner, portfolio manager at Altana Hard Currency Fund. "I would look beyond Thanksgiving week to see the trading range that sterling settles into."
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