What a difference a year has made for the British pound.
A trade-weighted index of the currency climbed to its strongest level since 2008 today on speculation surging retail sales will push the Bank of England closer to raising interest rates. This time last year, bets that the pound would weaken were building toward a record, data showed sales were contracting and central bank Governor Mervyn King was in favor of additional stimulus that tends to weaken a currency. U.K. two-year notes declined today, with yields climbing to more than double where they were a year ago.
“It wasn’t long ago that there was speculation about a triple-dip recession and that was reflected in a weaker sterling,” said Neil Jones, the head of hedge-fund sales at Mizuho Bank Ltd. in London. “Since then sentiment has turned a complete 180, and with it the currency. The U.K. will be the first major economy to raise interest rates. I’m looking for more of the same.”
The pound’s 10 percent surge in the past 12 months made it the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as speculation shifted to the timing of the first increase in central bank interest rates and away from bets the BOE would add stimulus. The economy is outperforming Britain’s peers, pushing up yields on fixed-income assets and boosting the currency’s allure.
A Deutsche Bank AG trade-weighted index of the pound climbed to 82.96 today, its strongest level since November 2008, as the U.K. currency appreciated versus all but one of its 16 major peers. Against the euro, sterling gained 0.5 percent to 80.97 pence at 4:32 p.m. London time after touching 80.86 pence, the strongest level since Jan. 3, 2013. It climbed for a fifth day against the dollar, gaining 0.2 percent to $1.6869.
While minutes released today of this month’s meeting showed officials on the BOE’s Monetary Policy Committee voted unanimously to keep the benchmark interest rate at a record-low 0.5 percent, they also indicated the policy decision was becoming “more balanced” for some of the nine members as the economy recovers.
Retail sales including auto fuel surged 1.3 percent in April from the previous month, when they rose an upwardly revised 0.5 percent, the Office for National Statistics said today in London. The gain exceeded analyst estimates for an increase of 0.4 percent.
“We’ve seen a very large increase in retail sales, significantly higher than expectations,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “With data like that it becomes nigh on impossible for the BOE to retain their stance. It makes the chance of a split in the MPC more likely, which will be good for the pound.”
On May 22, 2013, the ONS said U.K. retail sales dropped 1.3 percent in April from the previous month. The U.K. currency slid to the lowest in more than two months versus the dollar that day after minutes of the Bank of England’s meeting earlier the same month showed King and two other policy makers were defeated in their bid to expand bond buying.
The central bank bought 375 billion pounds of assets under King as it undertook a quantitative-easing program to boost the economy.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on an advance expanded to 76,976 on May 21, 2013, on its way to record-low net shorts of 77,738 set two weeks later. Traders held a net-long position of 31,755 last week, according to the most recent data from the Commodity Futures Trading Commission.
A report tomorrow will show the U.K. economy expanded 0.8 percent in the first quarter from the previous three months, in line with an initial estimate, according to the median forecast of analysts in a Bloomberg News survey. Gross domestic product has increased every quarter since the start of 2013, dispelling concern at the start of last year that Britain faced a technical recession.
As the currency strengthened with the economy, yields on shorter-maturity U.K. government bonds have also climbed. The rate on two-year securities increased three basis points, or 0.03 percentage point, today to 0.73 percent, more than double the rate on May 22, 2013.
The Bank of England’s benchmark interest rate has been at 0.5 percent since March 2009. While officials are divided over the amount of spare capacity in the economy, the minutes today showed all nine members agreed that they needed to see “more evidence of slack reducing” before it would be time to increase the benchmark rate.
The MPC also said that rate increases, when they start, will be gradual, and that borrowing costs are likely to remain below the historical average for some time. Bank of England Deputy Governor Charlie Bean said yesterday policy makers faced potential “potholes” when it comes to exiting the extraordinary stimulus measures they implemented during the recession.
The 10-year gilt yield increased four basis points to 2.65 percent today. The price of the 2.25 percent security due in September 2023 dropped 0.285, or 2.85 pounds per 1,000-pound face amount, to 96.76.
Gilts lost 0.5 percent in the 12 months through yesterday, Bloomberg World Bond Indexes show. German bonds gained 1.9 percent and Treasuries were little changed.