The U.K. currency strengthened at least 0.6 percent versus all of its 16 major counterparts this month as signs Britain’s economy is gaining momentum fueled speculation the Bank of England will have to raise interest rates sooner than it forecasts. Short-sterling futures declined in August as investors increased bets for higher borrowing costs. U.K. government bonds were little changed today after the 10-year yield reached the highest since August 2011 yesterday.
“Largely the pound’s been driven by the rise in short rates in the U.K. on the back of stronger-than-expected cyclical momentum in the economy,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “We’re close to a potential peak in the pound near term. The run of positive surprises we’ve seen on the economic data front could start to turn.”
The pound appreciated 0.1 percent to 85.33 pence per euro at 6:26 p.m. London time, having strengthened 2.5 percent in August, the biggest monthly gain since July 2012. The U.K. currency fell 0.1 percent to $1.5486, having appreciated 1.8 percent since July 31.
The pound may weaken to the low $1.50s and toward 88 pence per euro in the next three months, Bank of Tokyo-Mitsubishi’s Hardman said. The U.K. currency will decline to $1.50 by year-end, according to the median estimate of 75 analysts in a Bloomberg News survey.
GfK NOP Ltd.’s consumer sentiment index rose 3 points to minus 13, the highest since October 2009, the group said in London. U.K. house prices increased 0.6 percent in August after gaining a revised 0.9 percent a month earlier, Nationwide Building Society said. British lenders granted 60,624 mortgages, the most since March 2008, according to the Bank of England.
BOE Governor Mark Carney said policy makers will act if signs of a property bubble emerge.
“We are watching it closely and we will as appropriate make our views known in terms of the degree of this risk and the potential action that should be taken to address it,” Carney said in an interview with the Daily Mail published today.
The British Chambers of Commerce raised its economic forecasts today and said gross domestic product will increase 1.3 percent this year, up from its previous prediction of 0.9 percent. Growth (UKGRABIQ) accelerated to 0.7 percent last quarter, the Office for National Statistics said Aug. 23.
The pound has strengthened 5.6 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.5 percent and the dollar climbed 3.1 percent.
The 10-year gilt yielded 2.77 percent after rising to 2.84 percent yesterday, the highest since Aug. 1, 2011. The price of the 2.25 percent bond due in September 2023 was at 95.465.
The implied yield on the short-sterling contract expiring in December 2014 rose 20 basis points this month to 0.88 percent.
Bank of England policy makers have kept the main interest rate at a record-low 0.5 percent since March 2009 and will announce their next decision on Sept. 5.
Gilts lost investors 3.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 2.2 percent and Treasuries declined 3.2 percent.
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