Pound Advances to Eight-Month High on BOE Minutes as Gilts Slide

The pound strengthened to an eight-month high against the dollar and euro as Bank of England minutes showed officials saw no need for additional monetary stimulus as the economy improves.

The U.K. currency advanced for a fourth day versus the greenback as the minutes of the September meeting showed “no member judged that further stimulus was appropriate at present.” In August, some policy makers saw a “compelling” case for a loosening of policy. U.K. government bonds fell, with 10-year yields approaching the highest level since July 2011. The U.S. Federal Reserve ends a two-day meeting today amid speculation it will slow asset purchases.

“There has been the knee-jerk reaction you would expect as there is now less of a threat that stimulus would be increased,” said Christin Tuxen, a senior analyst at Danske Bank A/S in Copenhagen. “People have been caught by surprise by the strong data in the U.K. Unless the Fed does something very significant, there may be a limited market reaction.”

The pound rose 0.4 percent to $1.5968 at 4:28 p.m. London time after climbing to $1.5980, the highest since Jan. 18. The U.K. currency appreciated 0.5 percent to 83.59 pence per euro after reaching 83.53 pence, also the strongest since Jan. 18.

Sterling has risen 6.6 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.3 percent and the euro advanced 3.7 percent.

Unanimous Vote

The minutes, published today in London, also showed the Monetary Policy Committee voted 9-0 to keep the bond-purchase program at 375 billion pounds and benchmark interest rate at a record-low 0.5 percent.

The panel led by Governor Mark Carney introduced forward guidance last month, pledging to keep interest rates low until the unemployment rate falls to 7 percent. It was 7.7 percent in the three months through July.

“There were increased signs that the recovery was taking hold,” the Bank of England said. Recent data “presented an upside risk to the growth profile” published in the central bank’s August Inflation Report, the minutes showed.

The yield on the benchmark 10-year gilt jumped seven basis points, or 0.07 percentage point, to 3 percent after increasing to 3.05 percent on Sept. 11, the highest since July 27, 2011. The 2.25 percent bond due in September 2023 fell 0.54, or 5.40 pounds per 1,000-pound face amount, to 93.595.

The five-year gilt yield climbed eight basis points to 1.80 percent, meaning the rate is 16 basis points higher than that of similar-maturity Treasury notes.

‘We Struggle’

“We struggle with why five-year gilts are yielding more than five-year Treasuries,” Andrew Wickham, head of U.K. and global fixed-income at Insight Investment Management Ltd. in London, which oversees $256 billion in assets, said yesterday in an interview. “That doesn’t seem to represent where the respective economies and central banks are right now.”

The Debt Management Office is scheduled to auction 4.75 billion pounds of five-year gilts tomorrow. The U.K. last sold the securities on Aug. 6 at an average yield of 1.405 percent.

The two-year yield rose four basis points to 0.55 percent after reaching 0.57 percent, the highest since June 24. The implied yield on short-sterling contracts expiring in December 2014 climbed six basis points to 0.99 percent.

Gilts handed investors a loss of 4.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities dropped 2.4 percent and Treasuries declined 3.5 percent.

Fed Tapering

Analysts are divided on the amount by which the Federal Open Market Committee will scale back monthly asset purchases. Among 64 economists surveyed by Bloomberg News, 33 predict the Fed will reduce buying of Treasuries by $5 billion or less, with 31 forecasting a cut of $10 billion or more.

Trading patterns suggest the pound’s advance may be about to end, according to Commerzbank AG.

The U.K. currency rose this week to within 0.4 percent of $1.6035, the 78.6 percent Fibonacci retracement of its decline to this year’s low in July from its high in January, according to Commerzbank AG. Another measure of trading patterns, stochastic oscillators, also signal the pound has risen too far, too fast and may be overdue for a decline.

The pound fell to $1.4814 on July 9 from this year’s high of $1.6381 on Jan. 2, data compiled by Bloomberg show.

“There are enough warning signals to suggest that this is the time to exit long-sterling positions,” said Karen Jones, a technical strategist at Commerzbank in London. A long position is a bet an asset will rise.

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