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Pound Strengthens as Posen Ends Push for More QE; Gilts Decline

The pound strengthened to a 19-month high against the euro and gilts dropped after minutes of the Bank of England’s April meeting showed policy maker Adam Posen ended his push for further stimulus.

U.K. two-year yields climbed to the highest level in four weeks as central bank officials said inflation may pose more of a threat than they previously anticipated. Posen joined the majority of the nine-member Monetary Policy Committee in seeking no change to the 325 billion-pound ($519 billion) asset-purchase target, according to minutes of the April 4-5 gathering. Sterling also advanced versus all 16 of its major peers as a report showed jobless claims rose less than economists forecast.

Posen’s decision “is a surprise and may reflect a vision of higher inflation and a touch better growth prospects,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “I’m looking for the pound to trade at 80 pence per euro. Pound-dollar will break through the highs of the year soon.”

The pound appreciated 0.6 percent to 81.91 pence per euro at 4:53 p.m. London time after reaching 81.74, the strongest level since August 2010. Sterling climbed 0.6 percent to $1.6023, the highest since April 3.

Gilts Fall

The yield on the 10-year gilt rose four basis points, or 0.04 percentage point, to 2.13 percent after reaching 2.17 percent. The 4 percent bond maturing in March 2022 declined 0.345, or 3.45 pounds per 1,000-pound face amount, to 116.56.

The two-year yield advanced three basis points to 0.46 percent after rising 0.49 percent, the most since March 21.

The additional yield, or spread, investors demand to hold 10-year gilts over two-year notes was little changed at 167 basis points. The spread is holding above its April 10 low of 162 basis points and will meet resistance should it widen to its 100-day moving average of 174 basis points, according to data compiled by Bloomberg.

Resistance refers to an area on yield charts where orders to buy a security may be grouped.

Posen joined fellow policy maker David Miles in voting at the central bank’s March meeting to increase the bond-purchase program by 25 billion pounds to 350 billion pounds. Miles repeated his vote at April’s meeting, while describing his view on the need for more as “finely balanced.” The pound weakened 0.2 percent against the euro on Feb. 9 when the Bank of England last announced an increase of asset purchases.

Today’s minutes set the stage for a possible pause in May when policy makers will consider new quarterly forecasts. Data yesterday showed U.K. inflation unexpectedly accelerated for the first time in six months.

Inflation Bets

The 10-year breakeven rate, a gauge of inflation expectations derived from the yield difference between index-linked and conventional government bonds, slipped to 2.78 percentage points after climbing to 2.81, the highest since April 4.

Policy makers will keep inflation expectations anchored to the central bank’s 2 percent goal as the pace of price gains slows less than expected this year, said Bank of England Deputy Governor Paul Tucker.

“Inflation might remain above 3 percent throughout the second quarter of this year, and possibly into the second half of the year,” he said in a speech today in Liverpool, northwest England. The pace of consumer-price gains is “uncomfortably above target,” he said.

U.K. jobless claims increased by 3,600 in March to 1.61 million, the Office for National Statistics said in London. Economists surveyed by Bloomberg News predicted a gain of 6,000. Unemployment as measured by International Labour Organization methods dropped to 8.3 percent in the quarter through February from 8.4 percent.

Gilts declined 1.9 percent in the first quarter, the worst start since 1996, according to Bank of America Merrill Lynch indexes. They have returned 0.7 this month.

The Debt Management Office is scheduled to auction as much as 1.35 billion pounds of inflation-linked bonds due in 2029 tomorrow. It will sell bills the following day.

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