LONDON: Sterling delivered its best daily performance in five months on Wednesday after Britain's unemployment rate hit its lowest since mid-2008, more evidence for the UK being one of Europe's few economic bright spots and biggest financial draws.
The pound has been bolstered by the confirmation of a major merger deal in the buyout of brewer SABMiller, but the big banks are deeply divided on the prospects for the months ahead after a reeling in of expectations of higher official interest rates.
Dealers said many in the market were just trading the economic numbers with a short-term perspective this week. Having sold sterling ahead of inflation which was predictably low, they bought the pound on labour data which has tended to provide more optimism.
"The jobs numbers this morning were better than expected and that helped the pound cover all of yesterday's losses," analysts from Citi said in an update for U.S. clients.
Notably, after consumer prices fell last month, pay growth in the three months to August was also a touch slower than expected, and rates markets actually pushed back pricing for a first rise in Bank of England interest rates further into next year.
Yet sterling's rise was stellar. By 1630 GMT, it had gained
1.3 percent on the day to $1.5447, its biggest daily rise since May and taking it to the highest in almost a month. Against the euro, sterling rose 0.8 percent to 74.08 pence . It had touched an eight-month trough of 74.93 pence per euro on Tuesday after the inflation numbers.
"Real incomes are going up. which is good for domestic activity, so we think May will probably be when (the Bank of England) starts raising interest rates," said ING currency strategist Chris Turner.
He said he believed BoE Governor Mark Carney's position that a serious debate will start on tightening around the end of the year. A number of other analysts say the same, yet there is little evidence that investors as a whole agree: credit markets don't price in a rise until the end of next year.
Some analysts said sterling would continue to be supported by SABMiller's merger with Anheuser-Busch InBev -- which is worth 69 billion pounds in cash and will take time to pulse through the market.
But others said sterling was unlikely to strengthen much against the dollar, even if it might against the euro.
"Rather than advancing higher or attempting to recover momentum against the dollar, it looks far more likely that sterling will continue drifting towards $1.51, with this being the level where traders found confidence throughout previous weeks that this might be a 'bottom' for the pair," wrote FXTM analyst Jameel Ahmad.
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