The pound rose, approaching a six-year high against the yen, on speculation it will be supported by relatively higher interest rates even as the Bank of England delays increasing U.K. borrowing costs.
Sterling climbed against the dollar before data this week that analysts said will show U.K. gross domestic product expanded in the third quarter. While BOE interest rates are at a record-low 0.5 percent, they are higher than those of the euro area and Japan, where policy makers are embarking on more stimulus measures that tend to devalue local currencies. U.K. 10-year government bonds ended a two-day advance, with yields rising from a five-week low.
The policy “divergence trade is still very much a strong force” even as U.K. data “has been slightly more mediocre than previously,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “Sterling will outperform against all the others” including the yen and the euro which are being pulled down by prospects of new stimulus measures, he said.
Sterling gained 0.8 percent to 185.90 yen at 4:17 p.m. London time after jumping to 186.13 yen on Nov. 20, the highest since October 2008. The U.K. currency rose 0.3 percent to $1.5702. It fell to $1.5590 on Nov. 19, the lowest since Sept. 6, 2013. The pound slipped 0.1 percent to 79.22 pence per euro after reaching 79.03 pence, the strongest level since Nov. 13.
Mizuho’s Jones said he expects the pound to drop to $1.55 by year-end and reach $1.5250 in the first quarter of next year.
While sterling fell 0.5 percent in the past month, it has still gained 4.5 percent in the last 12 months, the biggest advance after the dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.
The Office for National Statistics will say on Nov. 26 that GDP increased 0.7 percent in the three months through September, the same as the period through June, according to the median estimate of economists in a Bloomberg news survey. U.K. exports fell 0.1 percent in the period, after a drop of 0.4 percent in the previous three months, according to the economists.
Sterling has jumped 3.5 percent against the yen since Oct. 31, when the Bank of Japan, led by Governor Haruhiko Kuroda, expanded its monetary stimulus, a move that was forecast by just three of 32 analysts surveyed by Bloomberg News. Prime Minister Shinzo Abe delayed a planned sales-tax increase after the world’s third-largest economy slid into a recession.
British Bankers’ Association data tomorrow will show lenders granted fewer loans for homes last month compared with September, a separate survey of analysts forecasts.
Deutsche Bank AG pushed back its estimate for a rate increase from the BOE to August, after previously saying it expected borrowing costs to rise in February, its chief U.K. economist, George Buckley, wrote in a client note dated today.
Ten-year gilt yields were little changed at 2.05 percent after touching 2.04 percent, the least since Oct. 16. The price of the 2.75 percent bond due in September 2024 was at 106.155 percent of face value.
U.K. government securities have outperformed their German and U.S. counterparts this year as investors pared back expectations for higher interest rates. Gilts earned 11 percent through Nov. 21, according to Bloomberg World Bond Indexes. German securities returned 8.4 percent and U.S. Treasuries 5.2 percent.