The pound rose to its strongest level in a month against the dollar as the fastest increase in Britons’ wages since 2011 had traders rushing to reassess how soon the Bank of England may raise interest rates.
Sterling extended its gains into a seventh day versus the euro, the longest streak since March, after the 2.7 percent annual increase in average weekly earnings surpassed analyst estimates and pointed to tightening labor conditions. With the BOE saying at the same time that factors holding back the economy were fading, investors brought forward bets on the first increase in central-bank rates by two months to June next year.
“Markets are under-priced for the risk of a rate hike before the end of the year and re-pricing that risk should carry sterling higher,” said Adam Cole, head of global currency strategy at Royal Bank of Canada in London.
The pound advanced versus 13 of its 16 major counterparts on Wednesday. The U.K. currency rose 0.4 percent to $1.5707 at 5 p.m. London time, and earlier reached $1.5755, its highest since May 15. Sterling appreciated 0.4 percent to 71.58 pence per euro. It touched 71.47 pence, the strongest level since June 1.
Among major currencies, only the dollar and Sweden’s krona have outperformed the pound in the past month, as prospects for looser monetary policy overseas enhanced the relative allure of U.K. assets. Now, the potential for the BOE to move sooner than the market had priced in may redouble that appeal.
The increase in average weekly earnings exceeded analysts’ forecasts for a 2.1 percent gain, while separate data from the Office for National Statistics also showed the U.K. jobless rate, as measured by International Labour Organisation standards, was at 5.5 percent in the three months through April. It hasn’t been lower since June 2008.
“Higher earnings are consistent with a tighter labor market,” strategists at Brown Brothers Harriman & Co., including New York-based global head of currency strategy, Marc Chandler, wrote in a client note. “Strong U.K. weekly earnings data has sent sterling to four-week highs and brought forward market-based measures of the BOE’s first rate hike.”
Investors are now fully pricing a quarter-point rate increase by June 2016, according to MPC-dated forward Sonia contracts data provided by ICAP Plc. That’s earlier than the August 2016 move priced in before the jobs data. It assumes the current four basis-point spread for Sonia fixings below the official bank rate would return to zero once the central bank raises borrowing costs.
BOE minutes showed the nine-member Monetary Policy Committee was unanimous in voting to keep the benchmark interest rate on hold at 0.5 percent this month, a level it has been at since March 2009. For two members, the June decision was still “finely balanced,” unchanged from recent meetings. Officials at the central bank said factors holding back the economy and keeping inflation below the target are fading.
Benchmark 10-year government bond yields rose seven basis points, or 0.07 percentage point, to 2.06 percent. The 5 percent gilt due in March 2025 fell 0.75, or 7.50 pounds per 1,000-pound face amount, to 125.76.