Pound Rises Most Since June as King Denies Talking Down Currency

The pound climbed the most since June against the dollar this week as Bank of England Governor Mervyn King said policy makers aren’t trying to talk it down.

Sterling strengthened the most against the euro since the week ended Feb. 8. “Markets determine the level of exchange rate, not us,” King said in an interview with ITV News on March 14, after the pound dropped to a 2 1/2-year low against the greenback. A gauge of U.K. inflation expectations rose to the highest in 4 1/2 years amid speculation the government may change the Bank of England’s remit to reduce the emphasis on price stability in order to boost the ailing economy.

“Given how big the moves down have been in sterling it’s probably not surprising that we were due a correction,” said Jonathan Webb, head of foreign-exchange strategy at Jefferies International Ltd.’s Jefferies Bache unit. “King’s comments caught the market wrong footed when the Bank of England have been persistently talking about the need for a weaker currency.”

The pound advanced 1.3 percent in the week to $1.5124 as of 5:03 p.m. London time yesterday. It dropped to $1.4832 on March 12, the weakest level since June 2010. Sterling strengthened 0.9 percent to 86.34 pence per euro.

The pound has dropped 5.3 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes.

A report on March 12 showed U.K. industrial production unexpectedly fell in January as factory output slumped, fueling concern Britain will slip into a triple-dip recession.

Gilts Yields

The 10-year gilt yield dropped 13 basis points to 1.94 percent as investors sought the safety of government debt as a haven from economic uncertainty. The National Institute of Economic and Social Research estimated that the economy shrank 0.1 percent in the three months through February.

The 1.75 percent security due September 2022 rose 1.06, or 10.60 pounds per 1,000-pound face amount, to 98.39.

The U.K. 10-year break-even rate, an index of inflation expectations that measures the yield difference between gilts and index-linked securities rose to 3.37 percent on March 14, the highest since September 2008.

Chancellor of the Exchequer George Osborne may announce changes to the Bank of England’s emphasis on price stability when he delivers his budget on March 20. The Debt Management Office will announce its funding plans for the coming year on the same day.

“There is maybe a chance that they will add in a specific growth target like the Federal Reserve, but actually I think it will be more a change in tone in what the government would like the Bank of England to achieve,” said Jefferies’ Webb. “The pound could benefit if the foreign-exchange market is disappointed that there isn’t a more substantial announcement.”

U.K. government bonds handed investors a loss of 1.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 0.6 percent and Treasuries fell 0.9 percent.

Before it's here, it's on the Bloomberg Terminal.