Pound Climbs to Nine-Week High Against Euro Before BOE Decision

The pound reached the strongest level in nine weeks against the euro before the Bank of England announces its monetary policy decision tomorrow.

The U.K. currency was about 0.2 percent from the highest since August 2009 versus the dollar amid speculation an improving economy will spur the central bank to increase interest rates sooner than it currently predicts. Bank of England governor Mark Carney said last week borrowing costs may remain low due to slack in the labor market. U.K. government bonds were little changed.

“The pound continues to trade at reasonably robust levels and should continue doing so,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. The gains are also “a reflection of dollar weakness more so than just sterling strength. However most of the U.K. data has been reasonably good.”

The pound was little changed at 82.05 pence per euro at 4:35 p.m. London time after appreciating to 81.93 pence, the strongest level since Feb. 28. The U.K. currency was also little changed at $1.6964, after advancing to $1.6996 yesterday, the strongest since Aug. 6, 2009.

Sterling has jumped 9.5 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 6 percent, while the dollar weakened 1.1 percent.

‘Considerable Slack’

There’s “still considerable slack in the labor market,” Carney was quoted by the Bristol Post newspaper as saying on April 29. “The Monetary Policy Committee is comfortable with the position we are at now,” he said.

The central bank will leave its Official Bank Rate at a record-low 0.5 percent tomorrow, according to all of the 51 economists surveyed by Bloomberg News.

The decision will be the first since the jobless rate dropped enough to void Carney’s initial commitment on borrowing costs. Even with unemployment falling, he has pushed back against expectations of an imminent rate increase, saying more spare capacity needs to be absorbed before policy makers can remove stimulus.

“The BOE is still in the running to be the second developed central bank to hike rates this cycle” after its New Zealand counterpart, Jane Foley, a senior currency strategist at Rabobank International in London, wrote today in a client note. Based on the more advanced business cycle of the U.K. economy, the pound is likely to strengthen a little versus the euro in coming months and reach 80 pence next year, she said.

Pound Forecasts

Britain’s currency will trade at 81 pence by Dec. 31 and appreciate to 78 pence by the end of 2015, according to the median forecast in a Bloomberg News survey of analysts.

The Organization for Economic Cooperation and Development yesterday raised its 2014 economic growth forecast for the U.K. to 3.2 percent from the 2.4 percent it projected in November, and increased its 2015 estimate to 2.7 percent from 2.5 percent.

The benchmark 10-year gilt yield was at 2.66 percent. The price of the 2.25 percent bond due in September 2023 was 96.62.

Gilts returned 3.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities earned 3.2 percent and Treasuries gained 2.6 percent.

(An earlier version of this story corrected the date of the pound’s high against the dollar.)

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Nicholas Reynolds, Keith Jenkins

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