By Matthew Brown Jan. 25 (Bloomberg) -- The pound rose, trading within 1 penny of a five-month high against the euro, before a report tomorrow that’s forecast to show the U.K. economy emerged from a recession in the fourth quarter. The British currency advanced against the dollar after a report from Rightmove Plc said U.K. house prices will extend gains over the next 12 months as supplies remain constrained and the economy improves. The Office for National Statistics will say tomorrow U.K. gross domestic product expanded 0.4 percent in the final three months of 2009, after contracting 0.2 percent in the third quarter, according to a Bloomberg survey. The U.S. Federal Reserve will decide on interest rates on Jan. 27. “Gross domestic product is the main focus for the pound at the moment,” said Henrik Gullberg, a currency strategist in London at Deutsche Bank AG. “Sterling has detached, to some extent, from the risk-on, risk-off story and is more driven by the macro outlook.” The pound strengthened 0.1 percent to 87.64 pence per euro as of 10:21 a.m. in London. It appreciated to 86.51 pence on Jan. 20, the strongest since Aug. 21. The British currency rose 0.2 percent to $1.6151. The pound is likely to drop this year no matter who prevails in this year’s election, because the next government may not have enough support in parliament to rein in the Group of 20’s biggest budget deficit, according to currency analysts. Hung Parliament Strategists cut forecasts on sterling versus the dollar by as much as 2 percent this month to the lowest since June. The currency will be weighed down by polls that point to the first parliamentary stalemate in a generation, growth that lags behind the four biggest industrialized economies and a fiscal shortfall that has ballooned to almost 13 percent of gross domestic product, double what it was a year ago, the strategists said. U.K. two-year government bonds fell, pushing the yield up 2 basis points to 1.25 percent. The 3.25 percent security due December 2011 fell 0.03, or 30 pence per 1,000-pound ($1,616) face amount, to 103.68. Ten-year gilt yields rose 1 basis point, or 0.01 percentage point, to 3.93 percent. Gilts have returned 0.6 percent this year, compared with 1.1 percent for German government bonds and 1.5 percent for U.S. Treasuries, according to indexes compiled by Bank of America Corp’s Merrill Lynch unit. To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net

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