Sterling jumped against the euro and pulled further away from five-year lows versus the dollar on Wednesday on a view that the UK's bank recapitalisation plan was leading the way in helping stem the global financial crisis.
The perception that the UK is ahead of the curve in dealing with the worst crisis since the 1930s helped traders to look through more poor economic data, but a rise in the UK jobless rate reflected deepening domestic problems and cemented calls for further monetary easing. Figures released earlier showed that British unemployment shot up at its fastest pace since the early 1990s recession this summer, with bigger rises ahead predicted as the financial crisis takes it toll on companies across the economy.
"The employment data was weak, there's no argument about that," said Naeem Wahid, currency strategist at Bank of Scotland Treasury Services in London. "But from a sterling perspective we're getting slight outperformance based on the fact that the UK seems to be leading this improvement in the banking sector crisis," he added.
By 1450 GMT, the pound was up nearly 0.5 percent on the day at $1.7485 - well away from five-year lows seen last week around the $1.68 mark - while the euro was down 0.7 percent at 77.70 pence. Traders largely ignored Tuesday's UK inflation surge to an annualised 5.2 percent in September.
While that was higher than the 5 percent rise expected by economists, financial markets still expect more UK interest rate cuts as economic decline saps inflationary pressures. The weakness of the UK economy was also underlined on Tuesday by a Royal Institution of Chartered Surveyors report showing the decline in UK house prices accelerated in September and sales fell to their lowest in at least 30 years.