The pound rose to eight-month highs versus the dollar and euro as minutes of the Bank of England’s meeting this month showed officials saw no need for additional stimulus as the economy strengthens.
U.K. government bonds declined, with 10-year yields approaching the highest in two years, as the minutes of the September meeting showed that “no member judged that further stimulus was appropriate at present.” That compares to August, when some Monetary Policy Committee members saw a “compelling” case for a loosening of policy. The U.S. Federal Reserve concludes a two-day meeting today amid speculation it may trim its $85 billion of monthly 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 (DANSKE) 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 gained 0.4 percent to $1.5968 at 11:56 a.m. London time after reaching $1.5980, the highest since Jan. 18. Sterling appreciated 0.5 percent to 83.62 pence per euro after touching 83.53 pence, also the strongest level since Jan. 18.
Bank of England officials, headed by Governor Mark Carney, provided an assessment of forward guidance last month and said they won’t raise borrowing costs until unemployment falls to 7 percent. While they don’t see that happening until late 2016, signs of strength in the economy have prompted investors to bet on an earlier increase.
“Domestically, 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.
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.
The 10-year gilt yield climbed six basis points, or 0.06 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 0.525, or 5.25 pounds per 1,000-pound face amount, to 93.61.
The two-year yield touched 0.57 percent, the most since June 24, while the implied yield on short-sterling contracts expiring in December 2014 climbed as much as eight basis points to 1.01 percent.
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, compared with 1.422 percent at a previous sale on June 20.
The five-year yield rose seven basis points to 1.79 percent, leaving the difference, or spread, over similar-maturity U.S. Treasury notes at 17 basis points, the most since June 24, based on closing prices.
“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., which oversees $256 billion in assets, said in an interview in London yesterday. “That doesn’t seem to represent where the respective economies and central banks are right now.”
The pound has risen 6.7 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.3 percent and the euro advanced 3.7 percent.
Sterling’s advance may be threatened, with trading patterns suggesting economic data beating forecasts fails to reflect a fundamental shift in the U.K.’s prospects, according to Commerzbank AG.
Britain’s 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 January’s high point, according to Commerzbank. 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 a 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,” Karen Jones, a London-based technical strategist at Commerzbank, said in a phone interview yesterday. “Assuming that we see failure around here, the entire move up from July is a correction only,” Jones said in reference to the pound’s appreciation. A long position is a bet an asset will rise.
Gilts lost 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.
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