The pound fell the most in six weeks against the dollar after government data showed the U.K. unemployment rate climbed and wage increases slowed, adding to signs the economy is weakening.
Sterling dropped versus most of its 16 major counterparts as minutes of the Bank of England’s April meeting released today showed Governor Mervyn King pushed for additional stimulus for a third month before being outvoted. U.K. government bonds rose as investors sought safer assets. The International Monetary Fund cut its economic forecast for the U.K. yesterday and said the central bank should boost stimulus.
“The outlook for the U.K. economy and the pound are actually quite bad,” said Arne Rasmussen, head of currency research at Danske Bank A/S in Copenhagen. “The jobs data today is disappointing. That’s why investors should not underestimate the possibility the Bank of England will act aggressively to support growth even as it’s keeping the quantitative-easing target unchanged for now. The pound will fall much further.”
The U.K. currency dropped 0.8 percent to $1.5244 at 4:22 p.m. London time. It fell as much as 0.9 percent, the biggest decline since March 1. The pound rose 0.2 percent to 85.62 pence per euro, reversing a decline to 86.37 pence, the weakest level since March 15.
The 17-nation shared currency slid after European Central Bank Board member Jens Weidmann was quoted by Dow Jones as saying the ECB may cut rates if data warrants.
Joblessness as measured by International Labour Organisation methods rose by 70,000 to 2.56 million in the three months through February, the Office for National Statistics said. The unemployment rate climbed to 7.9 percent from 7.8 percent. Regular pay growth slowed to 1 percent, the least since records began in 2001.
Six members of the Bank of England’s Monetary Policy Committee voted to keep quantitative easing at 375 billion pounds this month, according to the minutes of the April 3-4 meeting. King, David Miles and Paul Fisher wanted to increase it by 25 billion pounds.
“The short-run trade-off between output growth and inflation meant that the committee could return inflation to the target more quickly than currently expected only by taking policy actions that would provide less support to output,” the MPC said.
The pound has tumbled 4.3 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 2.8 percent and the euro climbed 1.5 percent.
Three-month implied volatility for the pound against the dollar rose to 7.33 percent today, the highest since April 3.
U.K. 10-year bonds rose for the fourth time in five days as the jobs data fueled speculation the central bank will expand stimulus in coming months. Gilts also gained along with U.S. Treasuries and German bunds as a slide in European stocks and commodity prices boosted demand for safer assets.
The 10-year gilt yield dropped five basis points, or 0.05 percentage point, to 1.68 percent. The 1.75 percent bond maturing in September 2022 gained 0.44, or 4.40 pounds per 1,000-pound face amount, to 100.61.
Pacific Investment Management Co., which manages the world’s biggest bond fund, is holding fewer longer-maturity gilts than recommended by the benchmark it uses to gauge performance, according to Mike Amey, a money manager for the company in London.
Amey said the 30-year gilt yield, at 3.02 percent today, provides scant protection when inflation is taken into account.
Consumer prices rose 2.8 percent in March from a year earlier, a government report showed yesterday. The rate has been above the central bank’s target of 2 percent every month starting in December 2009.
“If you have a sticky inflation rate, and maybe we will hit 3 percent, then flat real yields on a 30-year bond don’t look like a great deal to me,” Amey said. “I’m still underweight.”
U.K. government bonds returned 1.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds and U.S. Treasuries both gained 0.6 percent.