Biggest pound gain since 2009 signals 'Brexit' anxiety easing

Easing anxiety over Britain's potential exit from the European Union may be complemented next week by signs of a stronger UK economy, supporting the pound further after its best week since 2009 against the dollar.

Britain's currency recovered from its steepest weekly decline versus the greenback in more than seven years as a report Friday showed wage-growth in the US unexpectedly fell last month, fuelling doubts that the Federal Reserve will raise interest rates anytime soon. A gauge of pound volatility versus the dollar this week retreated from its highest since 2011. Reports on March 9 will show UK industrial production and manufacturing rebounded in January, according to Bloomberg surveys of economists.

The UK currency gained for a second week versus the euro, strengthening the most since October. While the prospect of the Bank of England lifting its own borrowing costs has also diminished in recent months, investors see the European Central Bank set to inject more currency-debasing stimulus to the euro-area economy when policy makers meet March 10.

"When people settled down and took a look at the market they thought, OK maybe this is a bit overextended given the fact that we still have an enormous amount of time," said Peter Rosenstreich, head of market strategy at Swissquote Bank in Gland, Switzerland. "In the past two weeks there was a crescendo for near-term hype when it comes to 'Brexit', and it solidified itself on traders' mental map and it became very real."

Sterling gained 2.6 per cent this week to $1.4233 as of 5.26 pm London time on Friday, the biggest increase since October 2009. Britain's currency strengthened 1.9 per cent to 77.31 pence per euro, the biggest advance since the period ended October 23.

Six-month implied volatility for the pound versus the dollar, a measure of price swings based on options, dropped to 12.84 per cent on Friday. It has fallen from 13.64 per cent reached February 24, the highest since September 2011 based on closing prices.

UK government bonds dropped this week, with the 10-year gilt yield climbing nine basis points, or 0.09 percentage point, to 1.48 per cent.