The pound strengthened the most in six weeks against the euro after Bank of England policy maker Martin Weale said U.K. interest rates should increase as the economy recovers.
Sterling advanced for a third day versus the dollar as Weale told the Reading Post that “as the economy returns to normal, interest rates should return to more normal level.” The pound has outperformed all its 31 major peers in the past year on bets quicker growth will spur the central bank to bring forward rate increases. The European Central Bank is ready to take additional monetary policy measures, President Mario Draghi said yesterday. U.K. government bonds were little changed.
“It’s a sovereign-divergence trade going on right now,” said Neil Jones, head of European hedge-fund sales at Mizuho Bank Ltd. in London. “The expectation is that the next move for ECB could be lower rates, whilst the next move for BOE could be higher rates. I strongly believe some of the trades of note this morning are based on this future scenario.”
The pound appreciated 0.4 percent to 83.27 pence per euro at 4:33 p.m. London time, the biggest gain since Feb. 12. The U.K. currency strengthened 0.2 percent to $1.6566 after rising 0.3 percent during the previous two days.
Sterling has appreciated 10 percent in the past year, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 8.1 percent, while the dollar was little changed.
“As the economy recovers, the interest rate isn’t going to stay at half a percent indefinitely,” Weale was cited by the Reading Post as saying. “While my best guess is any rises will be relatively gradual, the committee can’t give any guarantees about where interest rates will be.”
Pacific Investment Management Co. said yesterday currency traders have priced in the effect of Bank of England interest-rate increases into the pound-dollar exchange rate, potentially limiting the pound’s advance when borrowing costs do rise.
At around $1.65, the market has “in our view, already priced in much of the change in timing of U.K. rate hikes,” Mike Amey, a money manager at Pimco in London, wrote in an e-mailed note. “It suggests that a further spike up in the pound is not that likely.”
The Bank of England has kept its benchmark rate at a record-low 0.5 percent since March 2009, while the ECB’s main refinancing rate is 0.25 percent. U.K. policy makers announce their next decision on April 10.
The implied yield on short-sterling futures expiring in December was little changed at 0.75 percent, while that on the March 2015 contract was at 0.94 percent.
The 10-year gilt yield was at 2.70 percent after falling to 2.64 percent on March 3, the lowest since Nov. 5. The price of the 2.25 percent bond due in September 2023 was 96.26.
Gilts returned 2.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries earned 1.6 percent and German securities gained 2.5 percent.