Pound Climbs to 2 1/2 Year-High Versus Dollar on BOE Rate Bets

The pound climbed to the highest level against the dollar since May 2011 amid speculation Bank of England policy makers will raise interest rates sooner than they predict as the economy shows signs of gaining momentum.

Sterling fell from near the strongest level in a year against the euro after data showed factory output in the 18-member bloc expanded faster in January than economists estimated. Ten-year government bonds rose even as the U.K. Debt Management Office auctioned 3.25 billion pounds ($5.4 billion) of the benchmark securities. Bank of England Markets Director Paul Fisher said today there’s no immediate need to increase borrowing costs.

“The market at the moment is going to maintain a fairly sterling-positive environment overall,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “If we start to see the Bank of England more formally pushing back against rate-hike expectations next month, then that would put sterling back under pressure.”

The pound gained 0.2 percent to $1.6606 at 4:42 p.m. London time after climbing to $1.6636, the highest since May 3, 2011. The U.K. currency weakened 0.7 percent to 82.33 pence per euro after appreciating to 81.68 pence yesterday, the strongest level since Jan. 10, 2013.

A government report yesterday showed the jobless rate fell to 7.1 percent in the three months through November, approaching the 7 percent threshold at which Bank of England officials say they will review borrowing costs. The central bank kept the key interest rate at a record-low 0.5 percent at a policy meeting this month.

‘Only Gradually’

“We are still some way off the point where it is appropriate to start raising bank rate,” Fisher said in a speech at State Street Global Advisors in London. “When it is time, it would be appropriate to do so only gradually.”

The pound stayed higher against the dollar after the BBC reported Bank of England Governor Mark Carney said there was no immediate need to increase interest rates. Carney is scheduled to speak at the World Economic Forum in Davos, Switzerland, tomorrow and Saturday.

Sterling has gained 9.4 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 7 percent and the dollar gained 3.9 percent.

‘Looks Solid’

“Sterling still looks solid although we clearly have to be mindful of the extent and speed of the rise we’ve seen recently,” Steve Barrow, the London-based head of Group-of-10 research at Standard Bank Plc, wrote in an e-mailed report.

Standard Bank’s trading model recommends investors buy the pound against the yen, forecasting it will advance to 175.40 yen, a level last seen in October 2008, Barrow wrote.

The pound slipped 0.6 percent to 172.20 yen today.

An index of annual sales growth fell to 14 from an 18-month high of 34 in December, the Confederation of British Industry said today. The median estimate in a Bloomberg News survey of economists was for a drop to 25.

The 10-year gilt yield fell seven basis points, or 0.07 percentage point, to 2.81 percent. The 2.25 percent security due in September 2023 rose 0.59, or 5.90 pounds per 1,000-pound face amount, to 95.28.

The debt office allotted the benchmark gilts at an average yield of 2.87 percent. It sold securities due in March 2025 on Dec. 3 at an average yield of 2.977 percent and last auctioned the 2023 bonds at 2.732 percent on Nov. 19.

U.K. gilts lost 2.1 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. Treasuries fell 2.5 percent, while German securities returned 0.2 percent.

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