While the past week may have left pound bulls bruised, they’re far from defeated.
Sterling fell the most since May against the euro as a report showed U.K. retail sales unexpectedly shrank in June, puncturing investors’ optimism about the strength of the economy and the scope for higher interest rates. Still, with data next week likely to show economic growth quickened in the second quarter, the case for higher borrowing costs may be boosted once again.
“The risk is that, over the course of the summer, actually sterling will start to come back, and come back quite strongly,” said Simon Derrick, chief markets strategist at Bank of New York Mellon Corp. in London. “We’re in a pretty benign investment environment. The only thing that, therefore, is on investors mind is: Where can I pick up any kind of yield?”
The pound depreciated 1.8 percent in the past week to 70.75 pence per euro as of 5 p.m. in London on Friday. It strengthened 3.6 percent the previous week. Sterling dropped 0.5 percent to $1.5516.
A report on July 28 will show the U.K. economy grew 0.7 percent in the second quarter, compared with 0.4 percent in the previous three months, according to the median estimate of analysts in a Bloomberg survey. The pound may strengthen toward 65 pence per euro in the next six months, Derrick said.
The currency was buoyed in the week starting July 13 by statements from Bank of England Governor Mark Carney that an interest-rate increase was in sight, and it delivered its best performance against the euro since 2009.
Minutes of the BOE’s July meeting, released on July 22, showed a growing number of the nine Monetary Policy Committee members had become concerned inflationary pressures were rising.
Investors are speculating rates will rise next May, compared with August 2016 as recently as July 10, according to forward contracts based on the sterling overnight index average, or Sonia.
U.K. government bonds rose in the past week, with the yield on 10-year gilts falling 14 basis points, or 0.14 percentage point, to 1.93 percent. The 5 percent security due in March 2025 advanced 1.39, or 13.90 pounds per 1,000-pound face amount, to 126.775.
While “the June retail sales figures were very disappointing,” otherwise “things are generally good for the pound,” said Marshall Gittler, head of global currency strategy at IronFX Financial Services Ltd. in Limassol, Cyprus. “Carney continues to talk about the likelihood of tightening, and the BOE MPC minutes showed a sharpening division within the MPC.”