Sept. 11 (Bloomberg) -- The pound strengthened to a seven-month high against the dollar after a government report showed unemployment unexpectedly declined, adding to signs the U.K. economy is gaining momentum.
Sterling climbed to the strongest since January versus the euro as the jobless rate moved toward the 7 percent threshold at which the Bank of England said it will reassess it policy of keeping interest rates low. Central bank Governor Mark Carney along with fellow policy makers Paul Fisher, David Miles and Ian McCafferty will testify to parliament tomorrow. U.K. government bonds were little changed after benchmark 10-year yields climbed to the highest level in two years.
“The pound is likely to maintain its recent momentum in the near term,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “It will probably take another two years before the unemployment rate drops to the 7 percent target. Still, a decline in jobless claims will no doubt help in terms of sentiment.”
The pound advanced 0.5 percent to $1.5811 at 4:42 p.m. London time after rising to $1.5827, the highest since Feb. 8. The U.K. currency rose 0.2 percent to 84.16 pence per euro after appreciating to 83.83 pence, the strongest since Jan. 23.
Sterling has strengthened 7.6 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.9 percent and the euro advanced 3.1 percent.
The U.K. unemployment rate as measured by International Labour Organization methods dropped to 7.7 percent in the three months through July from 7.8 percent in the second quarter, the Office for National Statistics said in London. The median forecast of economists was for 7.8 percent. In August, jobless claims fell 32,600, more than analysts had forecast.
The improving data may not bring an interest-rate increase forward, according to Capital Economics Ltd.
“Although employment rose strongly, more timely evidence from the recent activity surveys suggests that firms are responding to higher demand more by boosting productivity than taking on new workers,” said Martin Beck, a U.K. economist at Capital Economics in London. “We doubt today’s news significantly increases the chances of interest rates rising sooner rather than later.”
The 10-year gilt yield was at 3.02 percent after rising to 3.05 percent, the highest since July 2011. The price of the 2.25 percent bond maturing in September 2023 was 93.44. The two-year yield declined one basis point, or 0.01 percentage point, to 0.52 percent.
Bank of England officials introduced guidance on the path of interest rates last month and said they won’t raise borrowing costs until unemployment falls to 7 percent. While they don’t see that happening until late 2016, signs of strength in the economy have prompted investors to bet on an earlier increase.
The gilt reaction today “may also have been damped by the proximity of Carney’s testimony to the Treasury Committee tomorrow,” wrote Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “Carney is likely to be quizzed on guidance and perhaps what the MPC intends to do if the market continues to ignore” it, he said, referring to the central bank’s Monetary Policy Committee.
Gilts lost 5.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bunds dropped 3 percent and U.S. Treasuries fell 4.1 percent.
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