Pound Advances From 3-Week Low Versus Euro as Carney Sees Growth

The pound strengthened from the lowest level in three weeks against the euro as Bank of England Governor Mark Carney failed to convince investors that the central bank will keep interest rates at an all-time low.

Sterling pared a drop against the dollar and U.K. government bonds fell as Carney also said the BOE will move to boost the lending capacity of the nation’s largest banks. The governor has sought to underpin the recovery by introducing guidance to damp speculation that borrowing costs will rise anytime soon. He was speaking at an event hosted by the Confederation of British Industry in Nottingham, England.

“This is a bit more neutral than the market expected,” said Kit Juckes, a global strategist at Societe Generale SA in London. “Anyone who expected fireworks in the prepared remarks that would shock gilt yields into falling further and cause the pound to weaken is going to be a bit disappointed.”

The pound strengthened 0.4 percent to 85.81 pence per euro at 4:24 p.m. London time, after depreciating 0.4 percent to 86.52 pence, the weakest level since Aug. 7. Sterling fell 0.1 percent to $1.5527 after dropping to $1.5429, the lowest since Aug. 14.

“We are focused on doing what we can to reduce uncertainty and build resilience so that the recovery can be sustained despite the inevitable shocks ahead,” Carney said. “Our forward guidance was clear that, although we would not reduce the stimulus until the recovery is secure, we would if necessary provide more.”

‘Volatile’ Reaction

Under the forward-guidance policy, the BOE plans to keep its benchmark rate unchanged until unemployment, currently at 7.8 percent, reaches 7 percent. The central bank doesn’t see that happening until the end of 2016.

“He tried to talk the market down, but it’s not working so far,” said Christian Lawrence, a foreign-exchange strategist at Rabobank International in London. “The speech wasn’t hawkish but it wasn’t quite as dovish as expected by the market. We’ve seen a quite volatile price reaction, although I wouldn’t be surprised if sterling started to move lower.”

The pound has strengthened 5.1 percent in the past six months, the best performance according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies, amid signs economic growth is gathering pace. The euro gained 4.7 percent and the dollar climbed 2.3 percent.

Reduced Holdings

Gilts dropped as Carney said the central bank will allow the main U.K. lenders to shrink required holdings of low-yielding, easy-to-sell securities, such as government bonds, once they hold capital reserves equivalent to 7 percent of their risk-weighted assets.

The yield on the two-year gilt increased four basis points, or 0.04 percentage point, to 0.46 percent. The 4.75 percent security due in September 2015, fell 0.085, or 85 pence per 1,000-pound face amount, to 108.64.

The rate on the 2.25 percent gilt due in September 2023 rose three basis points to 2.81 percent. The bond became the 10-year benchmark today, according to the Debt Management Office.

Carney’s announcement on bank capital requirements counterbalances his dovish stance and indicates the Bank of England will do all it can to get the economy moving faster, according to Steve Barrow, head of Group-of-10 research at Standard Bank Plc in London.

Short-sterling futures fell today, indicating investors are adding to bets on higher interest rates. The implied yield on the contract expiring in December 2014 increased one basis point to 0.88 percent.

Investors should buy short-sterling futures contracts expiring between September 2014 and June 2015, expecting the average implied yield to decline about 20 basis points from about 0.94 percent in coming weeks, Jamie Searle, a London-based fixed-income strategist at Citigroup Inc., wrote in an e-mailed report today before Carney’s speech.

Gilts lost investors 3.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 2.1 percent and Treasuries declined 3.1 percent.

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