Pounding the euro on threat of rate increase

Carney comments

In his address to the gathering at the Mansion House in the City of London financial district yesterday, Carney said there are still risks to the recovery, including the strength of the pound, and any policy tightening will be “gradual and limited.”

“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced,” Carney said. “It could happen sooner than markets currently expect.”

The BOE’s key interest rate has been at 0.5 percent since March 2009. As recently as last month, Carney signaled officials were prepared to wait until next year to raise interest rates as the recovery could keep strengthening without fueling inflation.

“It was only a few weeks ago that Carney sounded a dovish note, so the contrast is certainly marked,” said Jane Foley, a senior currency strategist at Rabobank International in London. “That’s why it’s got the market’s attention. As long as the U.K. data continues to surprise on the upside, there is further downside potential in euro-sterling.”

Osborne pledge

Speaking at the same event, Chancellor of the Exchequer George Osborne promised the Bank of England new powers over mortgage lending to prevent the strengthening housing market derailing the recovery.

Sterling extended its gains after Fitch Ratings Ltd. affirmed the U.K.’s government bond grade at AA+, with a stable outlook, citing strong gross domestic product growth.

The U.K.’s two-year yield jumped 14 basis points, or 0.14 percentage point, to 0.87 percent, after reaching 0.89 percent, the highest since June 8, 2011. The 2 percent gilt due in January 2016 dropped 0.235, or 2.35 pounds per 1,000-pound face amount, to 101.79.

The 10-year yield climbed as much as eight basis points to 2.79 percent, the highest since March 11. The extra yield investors receive for holding 10-year gilts instead of German bonds was at 138 basis points, the widest since before the euro’s introduction in 1999, based on closing-price data compiled by Bloomberg.

Gilts returned 3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries earned 2.9 percent and German securities gained 3.9 percent.

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