The pound climbed to a seven-month high against the dollar, propelled by an unexpected increase in retail sales which added to traders’ conviction that the U.K. is on track to tighten monetary policy.
Sterling climbed for a fifth day after a report showed sales excluding auto fuel rose 0.2 percent in May from the prior month, while analysts surveyed by Bloomberg predicted a 0.2 percent drop. With the Bank of England saying Wednesday that headwinds facing the economy are ebbing, traders brought forward their calls for when the central bank will raise interest rates. The Federal Reserve’s view that aggressive rate boosts in the U.S. could derail America’s fragile recovery also helped the pound against the dollar.
“It is obviously a positive factor for sterling the real economy is improving,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “The real question is, is that going to translate into inflation?”
Recent wage data signaled inflation will climb and “the BOE will have a case for raising rates next year,” Nguyen said. Sterling was also boosted after BOE policy maker Kristin Forbes said Wednesday that price growth may rebound sharply.
The pound advanced 0.4 percent to $1.5896 as of 4:30 p.m. London time, after touching $1.5930, its highest since November. It appreciated 1.2 percent on Wednesday, its biggest gain in a month. Sterling weakened 0.3 percent to 71.80 pence per euro, a day after it reached a more than two-week high of 71.46.
“The wage data from yesterday kicked off sterling strength, and the Forbes comments boosted the hawkish argument for the BOE,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA in London.
While the Federal Open Market Committee indicated it will start increasing rates this year, Fed Chair Janet Yellen said she still wants to see “decisive” evidence of a lasting turnaround and that wage growth remains “subdued.” She was speaking Wednesday after the central bank kept borrowing costs unchanged.
“Uncertainty regarding monetary policy in the U.S. has increased since yesterday,” Commerzbank’s Nguyen said. “The dollar was weakened by the dovish FOMC comments.”
By contrast, the minutes of the BOE’s last policy meeting, also published Wednesday, prompted markets to bring forward their assessment of when U.K. rates will rise. Investors are now pricing in a quarter-point rate increase by July 2016, according to derivatives data from ICAP Plc.
Government bonds rose with their counterparts in Europe. Benchmark 10-year gilt yields fell two basis points, or 0.02 percentage point, to 2.04 percent. The 5 percent security due in March 2025 climbed 0.19, or 1.90 pounds per 1,000-pound face amount, to 125.95.
“The slower the Fed is and the longer it takes them to hike rates, the more time it gives the rest of the G-10 world to catch up,” Banco Santander’s Bennett said. “The U.K. is an obvious example.”