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U.K. Pound Posts Second Weekly Gain as Economy Gathers Momentum

Aug. 16 (Bloomberg) -- The pound posted a second weekly gain versus the euro and the dollar amid signs the U.K. economic recovery is gathering pace, fueling bets the Bank of England will raise interest rates earlier than policy makers forecast.

Sterling climbed to an eight-week high against the dollar as investors boosted wagers the central bank will increase its benchmark rate before 2016, when it anticipates the unemployment rate will have fallen enough to justify higher borrowing costs. U.K. government 10-year bonds dropped for a fourth week, with the yield climbing yesterday to the highest since August 2011.

“It’s another good week for the pound,” said Christian Lawrence, a foreign-exchange strategist at Rabobank International in London. “If data continues to improve, then that could possibly raise market expectations that the BOE will begin raising rates at a slightly earlier juncture.”

The pound was little changed at 85.32 pence per euro at 4:40 p.m. London time, after appreciating to 85.05 pence yesterday, the strongest since July 3. That left it with a 0.9 percent weekly gain versus the single currency. Sterling slipped 0.2 percent to $1.5619, after earlier rising to $1.5657, the highest level since June 19. Britain’s currency gained 0.8 percent versus its U.S. counterpart this week.

A government report yesterday showed retail sales rose last month more than economists forecast, while data a day earlier showed the rate for jobless claims fell to the least since February 2009. Purchasing managers surveys of services, manufacturing and construction activity all improved in July.

Carney Pledge

Bank of England Governor Mark Carney has pledged to refrain from raising borrowing costs until the jobless rate falls to 7 percent, which policy makers don’t expect until at least the fourth quarter of 2016. Seventeen of 25 forecasters in a Bloomberg survey see unemployment falling to that level by mid-2016, with 13 predicting it will happen in 2015 at the latest.

The implied yield on short-sterling futures contracts expiring in September 2016 rose to 2.23 percent yesterday, the most since June 24, signaling that traders boosted bets that interest rates would rise. The yield surged 37 basis points this week to 2.21 percent.

The U.K. currency has jumped 4 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 2.9 percent and the dollar strengthened 3.2 percent.

The pound’s advance provides an opportunity to sell, according to Morgan Stanley strategists led by Hans Redeker in London. They predict sterling will weaken to $1.48 in three months on bets the Bank of England will reaffirm its intention to keep interest rates low.

Market ‘Obsessed’

“The market is obsessed with the economic momentum, but there is a substantial output gap in the U.K., which will require several years of good economic performance to close,” Redeker, the head of global foreign-exchange strategy, said in a phone interview yesterday. “The Bank of England will make it clear pretty soon that it is focusing on the output gap.”

Ten-year yields rose two basis points, or 0.02 percentage point, to 2.70 percent, after climbing to 2.71 percent yesterday. The 1.75 percent bond due in September 2022 dropped 0.135, or 1.35 pounds per 1,000-pound face amount, to 92.39.

Gilts lost investors 4.6 percent this year through yesterday, according to Bloomberg World Bond Indexes show. German securities dropped 2.4 percent and Treasuries declined 3.4 percent.

To contact the reporter on this story: Morgane Lapeyre in London at mlapeyre@bloomberg.net

To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net

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