The euro fell below 79 pence for the first time since September 2012 on Wednesday while sterling hit another near-six year high against a basket of currencies after data showed UK employment at its highest level ever. Official data showed the number of people in employment rose by 254,000 to a record 30.643 million in the three months to May. The jobless rate fell to 6.5 percent from 6.6 percent a month earlier, another sign of the recovery in Britain's economy.
-- Sterling index hits near six-year high
But pay growth was weaker than expected, continuing to lag inflation, underscoring the Bank of England's view that the recovery can continue without risking a big pickup in price pressures. That disappointment sent the pound to a day's low of $1.7113 immediately after the data but it later recovered slightly and was last trading at $1.7128, down 0.1 percent on the day.
Sterling hit a two-year high of 78.905 pence per euro in European afternoon trading before weakening slightly to trade at 78.975, up a quarter of a percent on the day. The trade-weighted sterling index also hit 89.1, its highest since October 2008. "Once the market was able to look into the details of the overall employment report, the detail was very positive and provided a lot of evidence that the UK economy is continuing to strengthen and that strength looks to be fairly broad-based," said Ian Stannard, a currency strategist at Morgan Stanley.
The pound had hit an almost six-year high of $1.7192 on Tuesday after June numbers showed a sharp rise in inflation to 1.9 percent, within touching distance of the BoE's 2 percent target. Sterling has been on a bull run for a year now, gaining almost 15 percent against the dollar and just over 10 percent against the euro. The BoE is expected to be the first major western central bank to raise interest rates. Of its developed world peers, only New Zealand is currently raising rates and that has underpinned the pound, particularly against the euro in the past month.
"Sterling is one of the few currencies that has captured the interest of institutional players in the past few months," said Benjamin Feuer, head of foreign exchange for EMEA with brokerage New Edge in London. "Some of the locals here believe sterling is over-valued but I think from an international perspective it is pretty fairly valued. Realistically you probably wouldn't see it above $1.75 but you won't see it weaken either." British government bonds were little changed on Wednesday, underperforming German debt for a second consecutive day.
Ten-year gilts' yield spread over Bunds widened by around 2 basis points to peak at an eight-day high of 146.2 basis points, while the yield was unchanged at 2.65 percent at 1410 GMT. Marc Ostwald, a strategist at ADM Investor Services International, said that despite weak wage growth figures, the rest of the labour market data strengthened the case for an early BoE interest rate rise.
"You're looking at data that says (raise rates) sooner rather than later," he said, referring to strong growth in full-time employment. Thursday brings little in the way of new data, but the UK Debt Management Office is scheduled to sell 3.25 billion pounds ($5.57 billion) of 10-year index-linked gilts. Ostwald said he expected the issue to get solid demand from insurers and pension funds which need to buy inflation-linked bonds to match their liabilities. But otherwise he saw little attraction in the yield on offer, which offers a return 0.23 percentage points below retail price inflation.