The pound strengthened as Bank of England policy makers met to vote on interest rates before they release an unprecedented flow of central-bank data and forecasts on what’s being dubbed “Super Thursday.”
Sterling advanced versus all of its 16 major peers, gaining for a third day versus the euro. Britain’s government bonds dropped, pushing the 10-year yield up by the most in more than three weeks, as a report showed U.S. service providers expanded in July at the strongest pace in a decade, amid speculation that higher rates in the world’s largest economy will support an increase in the U.K.
Traders have become more bullish on the timing of higher British borrowing costs, with forward contracts based on the sterling overnight index average, or Sonia, showing they predict rates will rise in May. That’s three months earlier than implied as recently as July 10.
“At the very least, the BOE will validate the market’s recent thinking in terms of bringing forward the timing of a rate hike closer to early next year,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “We see euro-sterling moving to 65” pence by year-end, he said.
The pound appreciated 0.4 percent to 69.65 pence per euro at the 5 p.m. close in London, extending a 0.6 percent gain from the previous two days. The U.K. currency rose 0.3 percent to $1.5603.
Predictions that the U.K. will be among the first developed nations to increase borrowing costs has bolstered sterling. The pound is the best performer over the past month in a basket of 10 peers tracked by Bloomberg Correlation-Weighted Indexes, having strengthened 2.9 percent.
BOE officials were set to vote on Wednesday, before announcing their decision and publishing their Quarterly Inflation Report at noon in London Thursday. Governor Mark Carney plans to take questions from the press 45 minutes later.
Federal Reserve Bank of Atlanta President Dennis Lockhart said in a news report Tuesday that it would take a significant deterioration in economic data to put off an increase in U.S. benchmark borrowing costs in September.
Pressure on gilts was intensified after the Institute for Supply Management’s U.S. non-manufacturing index jumped by 4.3 points to 60.3 in July, the best reading since August 2005 and well above the most optimistic projection in a Bloomberg survey of economists.
The 10-year gilt yield rose 10 basis points, or 0.1 percentage point, to 1.98 percent, the biggest increase since July 10. The 5 percent bond due in March 2025 fell 1.035, or 10.35 pounds per 1,000-pound face amount, to 126.295.