The pound (FOREX:GBPUSD) rallied against the dollar and the euro after minutes of the Bank of England’s latest meeting showed policy makers voted unanimously against expanding their stimulus program that tends to debase the currency.
Sterling strengthened versus most of its 16 major peers. In Governor Mark Carney’s first policy meeting, Paul Fisher and David Miles dropped their call for an expansion of the asset- purchase program in favor of a strategy involving guidance on future interest rates, today’s minutes showed. Gilts dropped as data revealed U.K. unemployment claims fell at their fastest pace in three years. Federal Reserve Chairman Ben S. Bernanke said asset purchases “are by no means on a preset course.”
“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 0.2% to $1.5185 at 3:40 p.m. London time after falling to as low as $1.5079. It appreciated 0.6% to 86.31 pence per euro after touching 87.11 pence, the weakest level since March 13.
Sterling extended its gains versus the dollar after Bernanke said the U.S. central bank’s bond purchases could be reduced more quickly or expanded as economic conditions warrant.
Yield Difference
The benchmark 10-year gilt yield rose three basis points, or 0.03 percentage point, to 2.29%, after falling to 2.26% yesterday, the lowest since June 20. The 1.75% security maturing in September 2022 dropped 0.24, or 2.40 pounds per 1,000-pound face amount, to 95.56. Two-year yields were little changed at 0.31%.
“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 a signal from Bernanke that the U.S. 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 policy.
QE Ditched
“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 yield difference, or spread, between 10-year Treasuries and similar-maturity gilts narrowed. The U.K. securities yielded 18 basis points less than their U.S. peers, compared with 27 basis points yesterday, the biggest discount since August 2006.
The Bank of England kept its main interest rate at a record-low 0.5% 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.”
Unemployment Drops
Jobless claims fell 21,200 in June from the previous month 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%.
The pound has strengthened 2.2% in the past three months, according to Bloomberg Correlation-Weighted Indexes, as data showed the U.K. economy returned to growth in the first quarter and measures of services, manufacturing and construction all rose in June. The dollar rose 2.6% and the euro gained 3.2%, the indexes, which track 10 developed-nation currencies, also show.
The National Institute of Economic and Social Research estimates economic growth accelerated to 0.6% in the second quarter.
Gilts handed investors a loss of 2.2% this year through yesterday, according to Bloomberg World Bond Indexes. German bonds declined 0.7% and Treasuries fell 2.5%, the indexes show.
