Pound Climbs Most Since April as Jobs Data Adds to OptimismBy
Currency touches strongest level since Brexit referendum
Ten-year gilt yields rise to highest level since October
The pound rallied the most since April as hopes for a soft Brexit and stronger-than-forecast labor-market data bolstered the currency against a weaker dollar.
Sterling headed above $1.42 and climbed against all major peers, as signs that Britain may stay close to European Union rules after leaving the bloc helped the currency extend gains made on the back of strong U.K. jobs figures. The pound has also benefited from broad dollar weakness, with the British currency advancing nearly 3 percent this week as market positioning becomes increasingly bullish.
“The slide in the dollar is one variable,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce. “The strong rebound in the employment level is supportive as is the increasing assumption of a softer Brexit coming from the language of U.K. ministers.”
After data showed British employment rose and wage growth edged up in November, the pound gained momentum when U.K. Brexit Secretary David Davis told lawmakers the nation will initially stay closely aligned to the EU’s regulatory regime after it leaves. He also said an agreement could be fixed on a transition period following Brexit by March.
The pound rose as much as 1.7 percent, the most since April 18, to $1.4232. It strengthened 0.9 percent to 0.8709 pence per euro. The yield on U.K. 10-year government bonds rose six basis points to 1.41 percent, the highest level since October.
The Bloomberg British POUND Index, which measures the currency against a trade-weighted basket of peers, also surged, climbing to its highest level since July 2016, soon after the U.K. decided to leave the EU.
Option prices show traders are positioning for further pound strength, with demand for calls outweighing that for puts for the first time in nine years last week. Leveraged funds have also turned increasingly bullish on the U.K. currency, with CFTC data showing net pound longs at 48,051 contracts, the most since August 2015.
The strong jobs report could result in a repricing of market expectations for the next Bank of England interest-rate hike, which could further boost the pound, according to Scotiabank Europe Plc economist Alan Clarke. Markets currently price a hike in November this year.
“I’d expect baby steps at the February quarterly Inflation Report and then a move in the May meeting,” said Clarke. “Monetary Policy Committee speakers may help to shift the mood,” he added, with BOE Governor Mark Carney due to speak on a panel on Friday at the World Economic Forum’s annual meeting in Davos, Switzerland.
— With assistance by John Ainger