Pound Rises Versus Euro as Unemployment Rate Falls; Gilts Drop

The pound strengthened the most in six weeks against the euro as a report showing the U.K. unemployment rate unexpectedly fell to the lowest in 4 1/2 years added to signs the economic expansion is gathering pace.

Sterling had its first weekly advance this month versus the dollar even after Bank of England policy makers, led by Governor Mark Carney, said further currency strength risked crimping the recovery. U.K. bonds declined, pushing 10-year yields to the highest in more than three months, as prospects of stronger growth boosted speculation the central bank would raise interest rates sooner than it intended, even after inflation slowed in November to the least in four years.

“The main driver of sterling strength this week came in the form of the employment data,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London. “We have seen another solid week for U.K. data.”

The pound rose 0.8 percent this week, the most since the five days through Nov. 8, to 83.68 pence per euro at 5:50 p.m. London time yesterday. Sterling strengthened 0.3 percent to $1.6350, the first weekly advance since the period ended Nov. 29. It reached $1.6484 on Dec. 18, the highest since August 2011.

Under guidance introduced by Carney in August, the central bank pledged to keep interest rates low until the jobless rate falls to at least 7 percent, subject to caveats on financial stability and inflation. The rate dropped to 7.4 percent in the three months through October, the Office for National Statistics said Dec. 18. The median estimate in a Bloomberg News survey of economists was for it to stay at 7.6 percent.

Clear Sight

The jobs report “gives a clear line of sight to Carney’s 7 percent target, which should then trigger talk of interest rate movements in the U.K.,” McDarby said.

Further pound strength may hamper Britain’s economic recovery in an environment of weak global demand, according to minutes of the Dec. 4-5 Monetary Policy Committee meeting. Officials voted unanimously to keep interest rates at a record-low 0.5 percent and the bond-purchase program unchanged at 375 billion pounds, the minutes published on Dec. 18 showed.

The yield on benchmark 10-year gilts climbed five basis points, or 0.05 percentage point, this week to 2.94 percent yesterday, when they reached the highest since Sept. 18. The 2.25 percent security maturing in September 2023 fell 0.37 or 3.70 pounds per 1,000-pound face amount, to 94.18.

Gilts lost 4.1 percent this year through Dec. 19, according to Bloomberg World Bond Indexes. German securities fell 1.9 percent and Treasuries dropped 3 percent.