LONDON: Sterling rose sharply on Wednesday after a report showed the UK unemployment rate fell more than expected, raising expectations that an interest rate increase will be brought forward. The euro fell to a one-year low against sterling of 81.81 pence after the report, from 82.26 pence beforehand, leaving it down 0.6 percent on the day. The pound jumped to $1.6553, its highest in almost three weeks, from $1.6464. Volumes rose sharply in both pairs after the data. The UK's unemployment rate fell to 7.1 percent in November from 7.4 percent. Analysts had been expecting it to fall to 7.3 percent. The Bank of England said in minutes from its Monetary Policy Committee's latest rate-setting meeting that unemployment would reach its 7 percent threshold, when it will start to consider rate rises, "materially earlier than previously expected". But the Bank also said it saw "no immediate need" to raise rates. "The fall in unemployment has got the market more excited about raising rates this year," said Jane Foley, a senior currency strategist at Rabobank. "(But) I'd imagine the MPC will push back against that in February, either by playing down the importance of the 7 percent threshold or lowering it." UK money markets are edging towards pricing in the chance of an interest rate rise in 11 months' time, compared with in a year's time on Tuesday. Markets now see a 60 percent chance of a rate hike in 18 months' time. The jump in sterling will provide a welcome boost for hedge funds, many of which have been betting on a rise in sterling. Rabobank's Foley said that while the pound is "well supported" by the data, it may start to fall ahead of the Bank's February inflation report. "Cable is close to its highs around about there," she said. Cable is the sterling-dollar rate. In August the BoE said that it would not raise interest rates until unemployment fell to 7 percent, something it forecast would take at least three years. Sterling has been the surprise performer over the past six months as the UK's economic recovery has taken hold, raising the prospect of interest rate hikes, although the pressure to do so was eased as CPI inflation fell back to the Bank of England's target in December. "The UK will be the first to raise rates amongst the major developed economies," said Neil Jones, head of hedge fund FX sales at Mizuho. "Sterling will continue to outperform." Sterling's rise against the euro was helped by a widening yield differential between 10-year British and German government bonds, which reached its highest in more than eight years on Wednesday after the data.

Source