Pound Rises to 6-Week High Versus Dollar After Inflation Report

The pound strengthened to a six-week high against the dollar, reversing a decline, amid speculation the outlook for growth and inflation will prevent the Bank of England from keeping borrowing costs at a record low.

Sterling rose the most since April versus the euro as the central bank raised its growth forecasts in its Inflation Report and said inflation probably won’t slow to its 2 percent target until around the end of 2015. While the Monetary Policy Committee led by Governor Mark Carney pledged to keep its stance accommodative until the jobless rate falls to 7 percent, it said the plan has three “knockouts,” two of which are linked to inflation. U.K. government bond yields rose to a six-week high.

“Carney needs to do a bit more convincing that rates will stay low,” said Jeremy Hale, head of macro strategy at Citigroup Inc. in London. “The reaction of asset classes suggests that the market was completely positioned for it. If I was Carney I’d be disappointed with this, with how markets have reacted. People have their doubts.”

The pound jumped 1.1 percent to $1.5510 at 4:35 p.m. London time after rising to $1.5531, the highest level since June 21. The U.K. currency appreciated 0.9 percent to 85.91 pence per the biggest one-day advance since April 25.

Pound’s Gain

Sterling has risen 1.8 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies, amid signs the economy is recovering. The euro strengthened 3.8 percent and the dollar gained 1.6 percent.

The Bank of England issued an assessment of introducing forward guidance along with its Inflation Report as requested by the government. The program is subject to caveats and will apply as long as the monetary-policy stance doesn’t threaten price stability or financial stability, it said in a statement.

“The MPC view the guidance route as the default monetary-policy approach and they are not actively considering more quantitative easing,” David Tinsley, an economist at BNP Paribas SA in London, wrote in a note to clients. “Accordingly we are removing our long-standing call for more” bond purchases by the central bank, he said.

The 10-year gilt yield rose one basis point, or 0.01 percentage point, to 2.49 percent after climbing to 2.56 percent, the highest level since June 25. The 1.75 percent bond due in September 2022 dropped 0.05, or 50 pence per 1,000-pound face amount, to 94.06.

Jobless Rate

The central bank said the unemployment level was a threshold, not a “trigger.” The jobless rate was at 7.8 percent in the quarter through May and the Bank of England sees it staying above 7 percent at least until the third quarter of 2016.

“Our knee-jerk reaction is that is a rather conservative assumption,” Alan Clarke, an economist at Scotiabank in London, wrote in a note to clients. “Our working assumption was that level of the unemployment rate could be reached at least a year earlier.”

Investors raised bets on higher interest rates after Carney spoke, signaling they expect inflation concerns to trump the bank’s new unemployment threshold. The implied yield on sterling futures contracts expiring in September 2016 rose eight basis points to 1.88 percent.

The Bank of England also boosted its 2013 and 2014 economic-growth predictions to 1.5 percent and 2.7 percent from 1.2 percent and 1.9 percent in May.

‘Much Better’

“The economy is already starting to look much better than it was a couple of months ago,” said Gavin Friend, a currency strategist at National Australia Bank Ltd. in London. “The BOE is saying we’re going to ensure the economic recovery.”

The central bank said the first “knockout” for its threshold plan was if policy makers judge it “more likely than not” inflation will be 0.5 percentage point above the goal in 18 to 24 months. The second is if the MPC believes medium-term inflation expectations “no longer remain sufficiently well anchored.” The third is if the Financial Policy Committee judges the current monetary policy stance poses a “significant threat to financial stability.”

U.K. government bonds have lost investors 3.4 percent in 2013, according to Bloomberg World Bond Indexes. U.S. Treasuries dropped 2.8 percent and German bunds declined 1.5 percent.

The 10-year break-even rate, a gauge of market inflation expectations derived from the difference in yield between regular and index-linked securities, fell one basis point to 3.07 percentage points after expanding to 3.11 percentage points on Aug. 2, the widest since July 17.

The Debt Management Office is scheduled to sell 1.3 billion pounds of inflation-linked gilts due in March 2034 tomorrow.

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