By Anchalee Worrachate and Eshe Nelson - Jul 17, 2013
The pound rallied against the dollar and the euro, reversing earlier declines, after minutes of the Bank of England’s latest meeting showed policy makers voted unanimously against expanding their stimulus program.
Sterling strengthened versus all of its 16 major peers as Paul Fisher and David Miles dropped their call for an expansion of the currency-debasing quantitative-easing program in favor of a “mixed strategy” involving guidance on the path of interest rates. A separate report showed U.K. unemployment claims fell at their fastest pace in three years in June. Gilts declined.
“It does seem certain that Carney is viewing forward guidance as a favored policy tool over quantitative easing, at least for the present time,” said Jane Foley, senior currency strategist at Rabobank International in London. “In the medium term, it’s still going to be difficult for sterling to pick up the pace.”
The pound rose 0.3 percent to $1.5204 at 11:18 a.m. London time after falling to as low as $1.5079 earlier today. It appreciated 0.4 percent to 86.47 pence per euro after touching 87.11 pence, the weakest level since March 13.
The benchmark 10-year bond yield jumped seven basis points, or 0.07 percentage point, to 2.33 percent, after falling to 2.26 percent yesterday, the lowest since June 20. The price of the 1.75 percent security maturing in September 2022 dropped 0.57, or 5.70 pounds per 1,000-pound face amount, to 95.225. Two-year gilt yields rose two basis points to 0.34 percent.
“Given the already large size of the asset purchase program, there was merit in pursuing a mixed strategy with regards to the different policy instruments,” the minutes said. “The committee’s August response to the requirement in its remit to assess the merits of forward guidance and intermediate thresholds would shed light on both the quantum of additional stimulus required and the form it should take.”
Carney joined the Bank of England on July 1 with a reputation for policy innovation earned in his previous role as Bank of Canada governor. The unprecedented measure of providing an indication on the interest-rate outlook followed indications from Federal Reserve Chairman Ben S. Bernanke that the central bank may start slowing its bond-buying program later this year. The Bank of England is due to announce next month how officials will use forward guidance when setting its policy.
“Let’s see what form of forward guidance we have in August as clearly they put QE in the bin,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in Paris. “We could have something a bit more specific. That could support the three- to five-year sector of the” government bond market, he said.
The Bank of England kept its main interest rate at a record-low 0.5 percent on July 4, left its asset-purchase target at 375 billion pounds and signaled it would keep borrowing costs low for longer than investors had expected. Policy maker Fisher said yesterday the unwinding of stimulus in the U.K. may be “years in the future.”
Jobless claims fell 21,200 from May to 1.48 million, the biggest drop since June 2010, the Office for National Statistics in London said today. Economists forecast a decline of 8,000 based on the median of 23 estimates in a Bloomberg survey. Unemployment as measured by International Labour Organisation standards fell 57,000 to 2.51 million in the three months through May. The rate was unchanged at 7.8 percent.
After returning to growth in the first quarter, Britain’s economy has shown some signs of gaining strength. Measures of services, manufacturing and construction all rose in June, while the National Institute of Economic and Social Research estimates economic growth accelerated to 0.6 percent in the second quarter.
The pound has strengthened 2.2 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 2.5 percent and the euro gained 3.5 percent.
Gilts handed investors a loss of 2.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds declined 0.7 percent and Treasuries fell 2.5 percent, the indexes show.
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