The pound advanced for a third day against the dollar after Bank of England Governor Mervyn King said policy makers aren’t trying to talk it down, damping speculation they are seeking a weaker sterling to spur growth.
Sterling headed for its biggest weekly gain in a month versus the euro after King said in an interview with ITV News yesterday that “markets determine the level of exchange rate, not us.” A gauge of U.K. inflation expectations fell as the central bank’s Chief Economist Spencer Dale today defended its emphasis on maintaining price stability. U.K. 10-year government bonds fell, paring a weekly advance.
“King had no choice when put on the spot to clarify that they take their mandate very seriously,” said Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon Corp. in London. “It all comes down to a market that has become totally hooked on what central bankers have to say. Sterling could be in for a test of the $1.52 level.”
The pound rose 0.3% to $1.5129 at 2:57 p.m. London time after climbing to $1.5177, the highest since March 5. The currency last traded at $1.52 on Feb. 28. Sterling weakened 0.1% to 86.32 pence per euro, still set for a 1% gain this week, the biggest increase since the period ended Feb. 8.
“We’re certainly not looking to push sterling down,” King told ITV, according to a transcript of his remarks. He also said an economic recovery is “in sight” said sterling was “broadly stable” and “at the same level we were after the impact of the financial crisis.”
Sterling has gained 1% this week, the best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro fell 0.1% and the dollar dropped 0.6%.
The pound has slumped 3.4% against the dollar since the start of last month. In that time, minutes of the central bank’s February decision showed King and two other policy makers were defeated in a push for more stimulus and Moody’s Investors Service cut the U.K.’s top credit rating.
“The pound has seen a sizeable bounce above $1.51, which we suspect has been primarily driven by the market’s overextended short positioning,” BNP Paribas SA analysts led by Steven Saywell in London wrote in an e-mailed note to clients. “Pound-dollar has already broken above the $1.5153 resistance level noted by our technical analyst, with the $1.5218 to provide next resistance.”
Resistance is an area on a price graph where technical analysts anticipate sell orders to be clustered.
Dale’s comments in a speech in London today come before Chancellor of the Exchequer George Osborne presents his annual budget on March 20, when he may rethink the Bank of England’s remit. The chief economist said that while it is right that inflation targeting “should be questioned and challenged,” policy makers must take account of the potential economic costs of letting price rises get out of control.
“The argument that monetary policy can be used to expand demand with little or no implications for inflation challenges the consensus” that the best contribution of policy makers is to deliver price stability, Dale said. “We should be nervous about how quickly we overturn that consensus.”
The 10-year gilt yield dropped three basis points, or 0.03 percentage point, to 1.94%. The 1.75% bond maturing in September 2022 rose 0.24, or 2.40 pounds per 1,000- pound face amount, to 98.41. The yield has dropped 13 basis points this week.
The U.K. 10-year break-even rate, an index of inflation expectations that measures the yield difference between gilts and index-linked securities, fell for a second day. It slipped three basis points to 3.27%, after rising to 3.37%, the highest since September 2008 yesterday.
U.K. government bonds handed investors a loss of 1.1% this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 0.6% and Treasuries fell 0.9%.