The pound climbed the most against the euro in more than a year this week after Bank of England Governor Mark Carney said the institution may raise its key interest rate earlier than investors expected.
Sterling reached the strongest level in 19 months versus the common currency and gained versus all but one of its 31 major peers as U.K. unemployment declined more than economists expected and industrial production rose at the fastest annual pace since 2011. Carney’s policy warning was in contrast to the European Central Bank, which last week cut rates and announced additional stimulus. U.K. government bonds fell with two-year yields climbing the most since February 2011.
“Policy divergence is going to be a big theme” in Group-of-10 economies, said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “The U.K. is at the forefront of that debate. The suggestion that the first rate hike could be earlier than the market is expecting could really push sterling higher in this environment.”
The pound appreciated 1.8 percent this week to 79.77 pence per euro at 5 p.m. London time yesterday, the biggest jump since the period ended Feb. 8, 2013 and reached 79.74 pence per euro, the strongest since Nov. 13, 2012. Sterling rose 0.9 percent to $1.6960 and touched $1.6992 yesterday, the highest since May 6.
The pound strengthened 9.2 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as the U.K.’s economic recovery shifted speculation to the timing of the first increase in central bank interest rates and away from bets the BOE would add stimulus. The euro gained 1.6 percent and the dollar rose 0.3 percent.
“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced,” Carney said at the Mansion House in the City of London financial district on June 12. “It could happen sooner than markets currently expect.”
Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting the benchmark rate will increase 25 basis points by February, versus May before Carney’s speech. The BOE’s key interest rate has been at 0.5 percent since March 2009. Minutes of this month’s central bank policy meeting will be released on June 18.
The U.K.’s two-year yield jumped 18 basis points, or 0.18 percentage point, this week to 0.86 percent, the biggest increase since February 2011. The rate touched 0.89 percent yesterday, the highest since June 8, 2011. The 2 percent gilt due in January 2016 dropped 0.32, or 3.20 pounds per 1,000-pound face amount, to 101.81. The 10-year yield climbed nine basis points to 2.75 percent.