Pounding the euro on threat of rate increase

The pound reached the strongest level in 19 months against the euro after Bank of England Governor Mark Carney said the institution may raise its key interest rate from a record low earlier than investors expected.

Sterling gained versus all but two of its 31 major peers even as Carney said higher borrowing costs might stretch homeowners burdened with debt and derail the recovery. Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting the benchmark rate will increase 25 basis points by February, versus May before Carney’s speech. U.K. government bonds declined, with two-year yields climbing to the highest since June 2011.

“Carney has helped deliver a repricing of the market,” said Michael Sneyd, a currency strategist at BNP Paribas SA in London. “Even from here there is more room for the market to bring forward rate hiking. We continue to like the pound.”

The pound appreciated 0.2 percent to 79.86 pence per euro at 2:53 p.m. London time and reached 79.76 pence, the strongest level since Nov. 13, 2012. It advanced for an eighth day versus the 18-nation common currency, its longest run of gains since April 2010. Sterling rose 0.2 percent to $1.6954 and touched $1.6992, the highest since May 6.

The pound has strengthened 9.1 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as the U.K.’s economic recovery shifted speculation to the timing of the first increase in central bank interest rates and away from bets the BOE would add stimulus. The euro gained 1.6 percent and the dollar rose 0.3 percent.

Robust economy

Reports this week added to evidence of a robust economy, showing U.K. unemployment declined more than expected and industrial production rose at the fastest annual pace since 2011. Carney’s comments set him at odds with the European Central Bank, which cut interest rates and announced additional stimulus measures last week.

In the wake of the ECB’s decisions, investors who want to profit from the Bank of England’s shift in bias should buy the pound versus the euro, Geoffrey Yu, a senior currency strategist at UBS AG in London, wrote in a note dated yesterday. The firm’s longer-term target of 75 pence per euro “now looks achievable far earlier than the 18-month horizon originally anticipated,” he wrote.

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