The pound surged to its strongest level in more than a week against the euro after a report showed service industries in the U.K. expanded at a faster pace in March, bolstering the case for higher interest rates. Sterling gained for a third day versus the dollar, while government bonds declined. A gauge based on a survey of companies from insurers to environmental consultants rose to 57.1, the most since February 2010, Markit Economics Ltd. and the Chartered Institute of Purchasing and Supply said. The median estimate of 26 economists surveyed by Bloomberg was for an unchanged 52.6 reading. Economists expect the Bank of England will keep its main rate at 0.5 percent this week as the European Central Bank tightens policy. “The number was much higher than all expectations across the market, so the net impact has been strong in favor of the pound,” said Roberto Mialich, a senior currency strategist at UniCredit SpA in Milan. “The data hints that the risk of a prolonged stagnation is vanishing. The BOE will be forced to raise rates this year, and this should limit the downside potential for sterling.” The pound appreciated 1 percent to 87.30 pence per euro as of 4 p.m. in London after reaching 87.14 pence, the strongest level since March 24. It was 0.9 percent stronger at $1.6269, after climbing to $1.6278, the strongest level since March 23. Britain’s currency bought 1.5030 Swiss francs, up from 1.4891 yesterday. U.K. 10-year gilts declined, pushing the yield three basis points higher to 3.74 percent. The U.K.’s debt management office plans to sell 1 billion pounds of inflation-linked gilts maturing in 2037 tomorrow. BOE Meeting Bank of England policymakers begin a two-day meeting tomorrow and economists forecast they will hold off raising rates to focus on boosting a faltering recovery rather than seeking to curb the fastest inflation since 2008. Home prices probably increased 0.2 percent in March from February, when they declined 0.9 percent, figures from Halifax, the mortgage unit of Lloyds Banking Group Plc, will say this week, according to the median estimate of 10 economists in a Bloomberg survey. U.K. house prices will climb 2.8 percent in the next six months as Britons become more confident about the outlook for the property market, according to the average response in a survey of 7,984 homeowners by Zoopla.co.uk released today. Short-Sterling Futures Britain’s currency climbed 2.7 percent against the dollar in the first quarter as data signaled the economy may be rebounding after shrinking in the last three months of 2010. The central bank said on March 29 that mortgage approvals rose in February to the highest level since November. Short-sterling futures fell, sending the implied yield on the contract expiring in December up three basis points to 1.54 percent, as traders added bets on a rate increase. The first-quarter expansion in the U.K.’s economy was weaker than expected, adding to the argument that the Bank of England should delay raising its key rate, the British Chambers of Commerce said. Gross domestic product probably grew between 0.6 percent and 0.7 percent from the fourth quarter, when the economy contracted 0.5 percent, BCC Chief Economist David Kern said in an interview in London yesterday. Investors should bet the pound will strengthen to 84 pence per euro as expectations for the difference between central bank rates narrows and euro-area credit risk will increase relative to the U.K., according to Citigroup Inc. “The latest surge in euro-pound has outpaced the move in foreign-exchange fundamentals,” New York-based Greg Anderson and Valentin Marinov in London wrote in an investor report today. “The market is getting excessively hawkish on the ECB relative to the Bank of England. Investors may be getting too complacent about the credit outlook for the euro area.” To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net. Emma Charlton in London at echarlton1@bloomberg.net; To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

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