The pound climbed to the strongest level in a year against the euro after a government report showed the U.K. jobless rate dropped more than economists forecast to the lowest in almost five years.
Sterling rose versus all of its 16 major peers as the Office for National Statistics said unemployment fell to 7.1 percent in the three months through November, approaching the threshold at which the Bank of England said it will review borrowing costs. BOE minutes released today showed policy makers see no need to raise interest rates soon. U.K. government bonds fell, pushing the extra yield investors demand to hold 10-year gilts over similar-maturity German bunds to an eight-year high.
“The data continue to come in in favor of a stronger sterling,” said Thomas Kressin, head of European foreign-exchange at Pacific Investment Management Co. in Munich. “Given the relative strong cyclical performance of the U.K. economy, sterling currently appears to be the most attractive currency in the G-4,” he said, referring to the group made up of the dollar, euro, pound and yen.
Sterling advanced 0.6 percent to 81.80 pence per euro at 4:44 p.m. London time after appreciating to 81.76 pence, the strongest since Jan. 10, 2013. The U.K. currency rose 0.6 percent to $1.6576 after climbing to $1.6587, the highest level since Jan. 2.
Bank of England Governor Mark Carney said in August that policy makers wouldn’t consider increasing borrowing costs at least until unemployment dropped to 7 percent.
The U.K. recovery has strengthened and the jobless rate will fall to that level “materially earlier” than previously forecast, according to the minutes of the Jan. 8-9 meeting. Policy makers saw “no immediate need to raise bank rate” even if it is reached in the near future, the minutes showed.
“The pound has justifiably rallied on the better-than-forecast number but the same questions remain over the sustainability of the U.K. recovery,” said Daragh Maher, a currency strategist at HSBC Holdings Plc in London. “The BOE stressed that breaching the unemployment threshold would not be a trigger for a rate hike, but for now, the data rules, and the pound is capitalizing.”
Pimco’s Kressin said he expects the pound’s gains to be limited on concern a stronger currency may harm the economy and the current-account balance.
The current-account deficit reached the most since 1989 as a percentage of gross domestic product in the three months through September, the U.K.’s statistics office said Dec. 20.
Sterling has gained 9.7 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 6.3 percent and the dollar gained 4.3 percent.
The benchmark 10-year gilt yield climbed five basis points, or 0.05 percentage point, to 2.88 percent. That’s the biggest increase since Dec. 27. The 2.25 percent bond due in September 2023 fell 0.39, or 3.90 pounds per 1,000-pound face amount, to 94.72.
The Bank of England won’t change the unemployment threshold after today’s data and will probably increase interest rates before the Federal Reserve, according to Stephen Cohen, the London-based head of investment strategy for international fixed income at BlackRock Inc., the world’s biggest money manager.
Five- to 10-year gilts are “the most vulnerable to the central bank policy divergence,” BlackRock’s Cohen said at a briefing in London.
Newton Investment Management, which oversees about $86 billion of assets, said today that it closed a position in the past few weeks betting that the price of 10-year gilts would fall more than those of shorter maturities on expectations of higher interest rates.
Newton, a unit of Bank of New York Mellon Corp., previously bet that 10-year gilts would decline in value and invested in three- to seven-year securities, head of fixed income Paul Brain said in an interview.
The additional yield investors demand to hold three-year gilts over their 10-year equivalents has fallen 15 basis points since the end of last year to 195 basis points. The spread widened to 217 basis points on Jan. 2, the most since July 2011.
The Debt Management Office is scheduled to auction 3.25 billion pounds of the benchmark 10-year securities tomorrow. It sold gilts maturing in March 2025 on Dec. 3 at an average yield of 2.977 percent and last auctioned the 2023 bonds at 2.732 percent on Nov. 19.
The extra yield investors demand to hold 10-year gilts instead of similar-maturity German bunds expanded three basis points to 113 basis points, the widest since October 2005.
U.K. gilts lost 1.5 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. Treasuries fell 2.3 percent, while German securities returned 0.4 percent.