Pound Jumps as Carney’s Hawkish Tone Sends Gilts Tumbling

(Bloomberg) -- The pound soared by the most in two months and U.K. bonds slumped as Bank of England Governor Mark Carney said the Monetary Policy Committee may need to begin removing stimulus.

Sterling climbed against all but one of its major peers as the comments marked a shift in emphasis for the governor, who signaled last week that now was not yet the time to start the tightening process. The yield on two-year gilts touched the highest in more than a year as money markets adjusted to the change in language.

Sterling has borne the brunt of political and economic uncertainty since the Brexit vote, and has been further buffeted in recent weeks by a growing split among policy makers over the future path of rates. The bank's Financial Policy Committee increased the countercyclical buffer Tuesday, marking the first unwinding of last year's stimulus package put in place by the bank.

“The headlines appear to be in complete contrast to the Mansion House speech last week, when he said now is not the time for tightening,” said Jane Foley, head of foreign-exchange strategy at Rabobank in London. “There is the possibility that the Bank of England will, over the next few months, fire other shots across the bow really to reduce that downside potential for the pound.”

• GBP/USD rises for sixth day, up 1.1% to $1.2956. That's the biggest move since the election was called on April 18
• 10-year gilt yields climb as much as 11bps to 1.20 percent, the highest since May 10; they gained 8bps on Tuesday, when the BOE raised the countercyclical buffer to 0.5% from 0% with the option to raise it further in November
  • 2Y yields climbed as much as 7bps to 0.34%
• MPC-dated SONIAs shift to fully price in first BOE rate hike in May 2018 vs August 2018 ahead of the release, and early 2019 just one week ago

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, David Goodman

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