LONDON, Dec 18 (Reuters) - 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 expected.
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.