LONDON Dec 18 Sterling jumped against the
dollar and euro on Wednesday after British unemployment fell by
more than expected, raising expectations that interest rates
could rise earlier than previously forecast.
The pound rose 0.8 percent to $1.6397 after news
that the jobless rate had fallen to 7.4 percent in October, its
lowest level in four-and-a-half years. Analysts had expected the
rate to remain at 7.6 percent.
The Bank of England said in its forward guidance in August
that it would not consider raising rates until unemployment fell
below 7 percent, something it expected to happen by the end of
2016. But last month it said unemployment could hit 7 percent as
early as the fourth quarter of 2014.
After Wednesday's data the sterling overnight interbank
average rates moved higher to price in the chance of an interest
rate hike within 15 months, compared with two years before the
data was released.
The euro fell 0.8 percent to 83.94 pence,
compared with 84.355 pence before the data.
The pound was also supported as the Confederation of British
Industry distributive trades survey's retail sales balance
surged to +34 in December, matching September's 15-month high.
The unemployment data gives sterling a boost ahead of the
key U.S. Federal Reserve decision on Wednesday on whether to
start cutting back its huge bond-buying programme.
"An audible gasp was heard around the markets when the UK
employment figures came out," said Lee McDarby, executive
director, corporate FX sales at Nomura International.
"Cable was looking heavy going into the Fed meeting this
evening, with the support level of $1.6215 in sight. This data
gives the pound a bit of breathing space again."
Cable is the exchange rate between sterling and the dollar.
However, there was a note of caution as the Bank of England
warned that Britain's economic recovery may be at risk if
sterling, which hit a five-year high against a basket of
currencies earlier this month, strengthens much further.
The Bank also said inflation could fall to its 2 percent
target for the first time in over four years early in 2014.
Ian Stannard, head of European currency strategy at Morgan
Stanley, said sterling could advance to $1.6450 and 83.50 pence
per euro after breaking out of its trading ranges, but he also
highlighted the Bank's warning on sterling's strength and its
comments on inflation as potentially dovish signals.
"It does look as if they're paying quite a bit of attention
to sterling," he said. "I see this as a temporary move higher,
particularly for cable."
Sterling has been one of the currency market's surprise
packages this year, rising strongly since the summer as
better-than-expected UK economic data has added weight to the
view that interest rates may rise earlier than previously
But it fell to a six-week trough versus the euro and a
three-week low against the dollar on Tuesday after data showed
UK annual inflation slowed in November to its lowest in four
years, giving the Bank some breathing space to keep interest
rates low to support the recovery.