The pound gained versus the dollar, euro and yen this week as the Bank of England increased its inflation forecasts, prompting speculation policy makers will refrain from further expanding their bond-purchase program. Sterling climbed to a three-month high versus Japan’s currency after a government report showed retail sales unexpectedly increased in January and central bank Governor Mervyn King said the economy should “gradually� recover. Gilts fell amid bets the central bank will curtail its asset purchases and as demand declined at a bond auction. “It has become extremely popular to scale back expectations for more quantitative easing and announce that the BOE is done on bond buying,� which is supporting the pound, said John Hydeskov, chief analyst at Danske Bank A/S in London. “The BOE has been slightly over-interpreted by the market, and I still think the pound will weaken.� The U.K. currency advanced 0.4 percent this week to $1.5819 as of 4:43 p.m. London time yesterday, extending its rally over the past five weeks to 3.3 percent. Sterling rose 0.7 percent to 83.15 pence per euro. The currency jumped 2.6 percent to 125.47 yen after reaching 125.71 yen, the strongest since Nov. 7. Slower Inflation Bank of England policy makers see U.K. inflation slowing to the 2 percent target by year-end and easing to 1.8 percent in two years, according to the Inflation Report published Feb. 15. The central bank on Feb. 9 kept its benchmark rate at a record low 0.5 percent and boosted its asset-purchase target by 50 billion pounds to 325 billion pounds to underpin the economy. Minutes of the meeting will be released on Feb. 22. “The inflation profile has been revised up materially,� said Sam Hill, a fixed-income strategist at RBC Capital Markets in London. “Consequently, while the door remains open to further asset purchases beyond the current 325 billion pound target, there is no strong bias in that direction.� Britain’s currency rose 0.5 percent over the week, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies, trimming its year-to-date loss to 0.8 percent. The yield on the 10-year gilt rose eight basis points this week to 2.19 percent. The 3.75 percent bond maturing in September 2021 fell 0.72, or 7.20 pounds per 1,000-pound face amount, to 113.4. Demand fell when the government auctioned 1.75 billion pounds of bonds on Feb. 16. Investors bid for 1.62 times the amount of the September 2034 debt allotted, down from 2.23 times the previous time the bonds were sold in August. The U.K. probably posted the widest budget surplus in four years in January, the biggest tax-collection month of the year. The surplus of 6.3 billion pounds compares with 5.2 billion pounds a year earlier, according to the median estimate of economists surveyed by Bloomberg before the Feb. 21 report. Gilts have handed investors a 1.8 percent loss this year, while German government bonds have slipped 0.4 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. To contact the reporter on this story: 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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