The pound fell from the strongest in 16 months against the euro as traders pushed back forecasts for when the Bank of England will raise interest rates after Governor Mark Carney said there remains slack in the economy.
U.K. government bonds advanced, with two-year yields having their biggest two-day decline since June, after a government report showed weekly earnings rose at a slower pace in the three months through March than economists estimated. Derivatives based on the sterling overnight interbank average showed expectations that policy makers will keep borrowing costs unchanged through April 2015. As recently as yesterday, they showed expectations for an increase in February.
“The pound has had a setback,” said Jane Foley, a senior currency strategist at Rabobank International in London. “There is good reason for Carney not to be in a particular rush to raise interest rates. His tone has served to curb some of the over-optimism that has been brewing recently. Many people who had been bringing” their rate expectations “forward will be re-evaluating that now,” she said.
The pound weakened 0.4 percent to 81.74 pence per euro at 4:46 p.m. London time after earlier appreciating to 81.27 pence, the strongest level since Jan. 7, 2013. Sterling declined 0.3 percent to $1.6781 after climbing to $1.6996 on May 6, the highest since August 2009.
U.K. policy makers in their quarterly Inflation Report said while the level of spare capacity in the economy had “narrowed slightly” in the past three months, there “remains scope to make greater inroads into slack before raising Bank Rate.” The Bank of England’s benchmark has been at a record-low 0.5 percent since March 2009.
The pound also dropped versus all except one of its 16 major counterparts as the Office for National Statistics said wages excluding bonuses increased 1.3 percent in the first quarter, less than the estimate of 1.5 percent in a Bloomberg survey. Jobless claims fell 25,100 in April, versus the 30,000 decline forecast in a separate survey.
The jobless rate measured by International Labour Organization methods dropped to 6.8 percent in the three months through March from 6.9 percent in the quarter through February.
“Sterling hasn’t liked the data,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “The earnings data was disappointing. It could give the Bank of England the excuse they need to hold rates for longer than people thought necessary.”
The two-year gilt yield fell eight basis points, or 0.08 percentage point, to 0.66 percent, the lowest since April 16. It fell five basis points yesterday, making the two-day decline the biggest since the period ended June 26. The 2 percent gilt due January 2016 rose 0.13, or 1.30 pounds per 1,000-pound face amount, to 102.245.
The benchmark 10-year yield slipped 10 basis points to 2.58 percent, the lowest since Oct. 31.
Gilts returned 3.2 percent this year through yesterday, Bloomberg World Bond Indexes show. German bonds gained 3.5 percent and Treasuries earned 2.7 percent.