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Pound Rises as Inflation at BOE Target Boosts Recovery Optimism

The pound rose for the first time in four days versus the euro as inflation slowed to the Bank of England’s target for the first time in more than four years, boosting optimism the U.K.’s economic recovery will strengthen.

Sterling climbed the most in two weeks versus the dollar as a report showed inflation reached the central bank’s 2 percent threshold last month, helping Governor Mark Carney to keep interest rates at a record low for longer. U.K. government bonds erased gains that had sent 10-year gilt yields to the lowest level in six weeks.

“Abating price pressures would continue to support the real purchasing power of U.K. consumers and prop up growth,” said Valentin Marinov, head of European Group-of-10 currency strategy at Citigroup Inc. in London. “The improving macroeconomic background should continue to support sterling and it could be a buy on dips.”

The pound appreciated 0.4 percent to 83.14 pence per euro at 4:28 p.m. London time after weakening 1.1 percent in the previous three days. Sterling rose 0.4 percent to $1.6448, the biggest advance since Dec. 27.

The pound gained 7.3 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro strengthened 2.7 percent and the dollar dropped 2.4 percent.

U.K. consumer-price inflation slowed from 2.1 percent in November, the Office for National Statistics said. The median estimate in a Bloomberg News survey of economists was for the rate to remain unchanged.

Forward Guidance

Carney introduced forward guidance on borrowing costs in August and pledged to keep the main interest rate at an all-time low as long as unemployment, currently at 7.4 percent, remains above 7 percent.

“Given recent declines in inflation, markets are now more interested in the underlying rate of declining unemployment, which could show a fall to within touching distance of the 7 percent level,” Michael Hewson, an analyst at CMC Markets in London, wrote in an e-mailed note.

The Office for National Statistics will release the latest unemployment data, for the three months through November, on Jan. 22.

The benchmark 10-year gilt yield was little changed at 2.83 percent after dropping to 2.82 percent, the lowest level since Dec. 3. The price of the 2.25 percent bond due in September 2023 was 95.13.

The 10-year break-even rate, a gauge of market inflation expectations derived from the yield difference between gilts and index-linked securities, increased four basis points to 3.09 percentage points. That compares with the average over the past year of 3.11 percentage points.

U.K. gilts dropped 1.2 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. Treasuries declined 2.1 percent, while German securities returned 0.3 percent.

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