May 15 (Bloomberg) -- Pound bulls still have reason to be optimistic following the Bank of England’s attempts to temper interest-rate expectations, according to firms from Bank of New York Mellon to Mizuho Bank Ltd.
While the currency tumbled after yesterday’s quarterly BOE Inflation Report pushed back forecasts of when borrowing costs will increase, strategists said the strong U.K. economy will underpin sterling. The pound remains less than 3 cents from the almost five-year high versus the dollar reached last week.
“Sterling will come back to fight another day,” Gavin Friend, a foreign-exchange strategist at National Australia Bank in London, said in a phone interview yesterday. “The dynamics of a strengthening economy place the U.K. well above its peers and it’s likely to be the first major economy to raise interest rates.”
BOE Governor Mark Carney said yesterday that the currency’s appreciation reflected the strength of Britain’s recovery. The pound has gained about 10 percent against the U.S. dollar in the past 12 months, the third-best performance among 175 global currencies tracked by Bloomberg.
The pound fell as much as 0.2 percent today to $1.6732, the weakest level since April 16, and was little changed at $1.6756 as of 7:58 a.m. in New York. Yesterday, it declined 0.4 percent. Sterling rose to $1.6996 on May 6, the highest level since August 2009.
Britain’s currency strengthened 0.3 percent to 81.54 pence per euro, paring yesterday’s 0.4 percent drop. Before the Inflation Report, it appreciated to 81.27, the highest level since January 2013.
“It’s definitely a setback, but give it time and the data will shine through,” Neil Jones, the head of hedge-fund sales at Mizuho in London, said in a phone interview yesterday. “It’s more than a blip, but it’s certainly not a threshold moment.”
Jones predicts the pound will trade above $1.70 and beyond 80 pence per euro by the end of this year. The median year-end forecasts in Bloomberg surveys, most of which were taken before the BOE announcement, are for $1.65 and 80 pence per euro.
While Carney pushed back expectations of the timing of the first rate increase, saying “today’s not the day,” he did confirm the economy’s moving closer to a point where it will need higher borrowing costs. BOE officials have stated they’ll start with rate increases, rather than selling some of the 375 billion pounds ($628 billion) of gilts they bought to stimulate the economy.
U.K. policy makers said that, while the level of spare capacity in the economy had “narrowed slightly” in the past three months, there “remains scope to make greater inroads into slack before raising” the main rate. The BOE has held its benchmark rate at a record-low 0.5 percent since March 2009.
Derivatives based on the sterling overnight interbank average show expectations policy makers will keep borrowing costs unchanged through April 2015. As recently as May 13, the contracts showed expectations for an increase in February.
“The bank is just trying to buy as much as time as it possibly can,” Neil Mellor, a London-based currency strategist at Bank of New York Mellon, said yesterday by phone. “The market will be looking for reasons to start buying again. I expect it to go back up for all the same reasons that caused it to go up in the first place.”
Not everyone is so optimistic, with Royal Bank of Canada saying that sterling’s failure to rise above $1.70 may presage further losses.
A close for the pound below $1.6808 would confirm “a bearish-trend reversal,” George Davis, the bank’s Toronto-based chief technical analyst, said yesterday in a note.
The BOE predicted yesterday that the U.K. economy will grow 3.4 percent this year, little changed from its February prediction, with inflation staying close to the 2 percent target over the next three years. The Organisation for Economic Cooperation and Development raised its growth prediction for the country in 2014 to 3.2 percent last week, from 2.4 percent in November. The U.S. will expand 2.6 percent this year, the OECD predicted.
Sterling has risen 3.2 percent versus a basket of 10 major peers in the past six months, the best performance in the group, Bloomberg Correlation-Weighted Indexes show. The euro gained 0.2 percent, while the dollar fell 1.1 percent.
BOE policy minutes released on April 23 showed officials voted unanimously last month to keep the key rate unchanged and to maintain the stock of purchased assets. If strength in the economy persists, that may start to change, according to yesterday’s Inflation Report. Minutes from this month’s Monetary Policy Committee meeting are scheduled for release next week.
“In the last few months of the year, you could see some MPC members voting for a hike if the economy continues to fly,” Steve Barrow, the head of Group-of-10 research at Standard Bank Plc in London, said yesterday by phone. “I remain a bull for sterling.”
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