Pound Jumps on Speculation BOE May Pause Asset-Purchase Program

By Lukanyo Mnyanda

Oct. 15 (Bloomberg) -- The pound rose the most against the euro in almost seven months on speculation policy makers will pause their bond-buying program as the economy shows signs of recovering from the recession.

Sterling also jumped versus the dollar, headed for its biggest three-day gain in more than two months, as the Financial Times cited Bank of England Markets Director Paul Fisher as saying policy makers would be more likely to pause asset purchases, giving themselves the option of “doing more later,” rather than stopping them. Rising asset prices and improved confidence may be signs the program is working, Deputy Governor Charles Bean said two days ago. A report yesterday showed U.K. unemployment rose less than forecast last month.

“If the market senses that unemployment and quantitative- easing supply measures are turning, the bears will cut and run,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “Bean catalyzed some bears into profit taking after comments on gradually removing the stimulus on pickup.”

The U.K. currency strengthened 1.7 percent to 91.87 pence per euro as of 11:01 a.m. in London, the biggest gain since March 24. The pound advanced 1.6 percent to $1.6231, pushing its gain in the three days to 2.7 percent, the most since the first week of August.

The pound may rise to $1.75 by the end of March, according to Jones. That compares with the $1.65 median prediction of 34 analyst forecasts compiled by Bloomberg.

‘More Confident Now’

Fisher said he’s “much more confident now” that the bank’s asset purchase program is having the “scale and speed of impact that we would have hoped for when we started,” according to the FT transcript.

As the recovery gathers pace, the central bank “will need gradually to remove the large monetary stimulus that we have imparted to the economy, otherwise we will be in danger of overshooting our 2 percent inflation target,” Bean said in a speech in London. The inflation rate was 1.1 percent last month from a year earlier, down from 1.6 percent in August, a government report showed on Oct. 13.

The number of people claiming jobless benefits increased by a less-than-forecast 20,800 in September, a report yesterday showed.

“The data hasn’t been as negative as feared and there has been some questioning whether the Bank of England will necessarily extend quantitative easing,” said Jeremy Stretch, a senior currency strategist at Rabobank International in London. “Speculators have sold sterling hard and there was always a risk of a snap back.”

Sterling Turnaround

Sterling declined 7.2 percent against the euro since June as the central bank increased its asset-purchase program and Bank of England Governor Mervyn King was cited in the Newcastle Journal as saying the pound’s weakening was “helpful” to the economy. It gained 12 percent versus the euro in the first half as the economy showed signs of emerging from the slump.

The yield on the 10-year gilt climbed 5 basis points to 3.55 percent, and the two-year note yield rose 3 basis points to 0.86 percent.

The short-sterling interest-rate futures contract expiring in March 2010 increased 1 basis point to 0.84 percent, signaling some investors are adding to bets policy makers will increase interest rates. The rate was at 0.78 percent on Sept. 28, the lowest level this year.

The Bank of England’s main interest rate is 0.5 percent, an all-time low.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net