Pound Advances to 7-Week High as Investors Look Beyond Election

The pound climbed to its highest level in seven weeks against the dollar as investors speculated that whatever the outcome of the U.K. election, it won’t derail the Bank of England’s path toward raising interest rates.

Sterling strengthened versus all but one of 16 major peers in the week. The U.K. currency has rebounded from an almost five-year low against the greenback set on April 13 amid optimism the BOE will become the second major central bank to increase rates after the Federal Reserve. Minutes of the U.K. central bank’s latest policy meeting published on April 22 showed keeping rates at a record low was a “finely balanced” decision for a minority of officials.

“Markets have finally realized that irrespective of who gets into power and what coalition is formed, the basic premise of economic policy won’t change,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “Some of the election-risk premia is being priced out and sterling appreciated. I won’t be surprised to see euro-sterling trade at substantially lower levels in the weeks ahead.”

The pound climbed 1.4 percent this week to $1.5172 as of 5 p.m. London time on Friday, when it reached $1.5186, the highest since March 6. Sterling appreciated for a third week versus the euro, gaining 0.8 percent to 71.65 pence. It touched 71.18 pence on April 23, the strongest level since March 16.

The U.K. currency may advance through 70 pence versus the euro within one-to-two months, Commerzbank’s Kinsella said.

Election Deadlock

Opinion polls are deadlocked ahead of the May 7 general election, with neither of the largest parties seen gaining enough support to govern alone, which risks leaving Britain with a minority administration. While that uncertainty helped send a gauge of expected volatility over the next two weeks to the highest level since the Scottish independence referendum in September on Friday, a three-month measure fell this week.

While Sonia forward contracts show investors are all but ruling out a U.K. rate increase before the middle of next year, other central banks are making policy more accommodative.

The European Central Bank is in the second month of its 1.1 trillion euro ($1.2 trillion) bond-buying program, while the Bank of Japan is continuing unprecedented stimulus measures.

U.K. government bonds declined for a second week, with the benchmark 10-year gilt yield rising to a six-week high. It climbed six basis points, or 0.06 percentage point, from April 17 to 1.65 percent. The 5 percent bond due in March 2025 fell 0.735, or 7.35 pounds per 1,000-pound face amount, to 130.395.

Official data will show the U.K. economy expanded 0.5 percent in the first three months of the year, according to the median forecast of analysts surveyed by Bloomberg before the report is released on April 28. That would be a ninth-straight quarter of growth. A day later, the Debt Management Office plans to sell 3 billion pounds of 10-year gilts, its final bond auction before the election.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE