Pound rises to two-year high vs. euro

The pound (CME:B6U14) rose to the strongest level in 22 months against the euro as a report showing U.K. unemployment slid to the lowest since 2008 added to signs the economy can withstand higher interest rates.

Sterling was about 0.3 percent from an almost six-year high versus the dollar. Today’s data added fuel to a resurgence in the pound’s world-beating rally that was given impetus yesterday when inflation exceeded economist estimates, spurring bets Bank of England Governor Mark Carney will hasten plans to increase borrowing costs. The report, which also showed slower pay growth, pushed a gauge of future price swings for the pound versus the euro to the highest in a month.

“The U.K. economy is on every measure outperforming euro land,” said Nick Parsons, head of research for U.K. and Europe at National Australia Bank Ltd. in London. “The fall in the jobless rate is clearly good news. Slowing wage growth is a temporary statistical phenomenon, which will be reversed. This is an opportunity to reload with sterling longs.” A long position is a bet an asset will appreciate in value.

The pound strengthened 0.3 percent to 78.95 pence per euro at 2:11 p.m. London time after touching 78.94, the strongest level since September 2012. Sterling was little changed at $1.7137 after appreciating to $1.7192 yesterday, the highest since October 2008.

Jobs report

One-month implied volatility for the pound versus the euro rose to as much as 5.07 percent, the highest level since June 18. The measure fell to 4.2 percent on July 3, the lowest since October 2007.

Unemployment slid to 6.5 percent in the three months through May, from 6.6 percent in the period ending April, the Office for National Statistics said in London today, in line with the median estimate of economists in a Bloomberg News survey. Jobless claims fell more than economists forecast.

Wage growth in the period slowed to 0.3 percent, the lowest since May 2009, from 0.8 percent in April. Pay increases excluding bonus payments fell to the least since records began in 2001.

The pound rose more than 12 percent in the past 12 months, the best performer among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 1 percent, while the dollar fell 2 percent.

Thirty-four percent of economists say the BOE will raise the benchmark rate by December, according to a Bloomberg News survey of 50 economists published this week. Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting the U.K. borrowing costs will increase 25 basis points by February.

U.K. government bonds were little changed, with the yield on benchmark 10-year gilts at 2.65 percent. The price of the 2.25 percent bond maturing in September 2023 was at 96.755.

Gilts returned 3.9 percent this year through yesterday, Bloomberg World Bond Indexes show. That compares with a 5.2 percent gain for German bunds and a 3.1 percent return for U.S. Treasuries.

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