Pound Harks Back to 2007 as BOE Seen Moving Toward Higher Rates

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The pound strengthened for a fourth day versus the euro as investors braced for an unprecedented slew of data from the Bank of England that may lend clarity on the timing of its first interest-rate increase in eight years.

Sterling approached the strongest level against the common currency since 2007 and gained versus 14 of its 16 major peers. BOE officials voted on Wednesday and will announce their decision, as well as publish their quarterly Inflation Report and a breakdown of votes, at noon Thursday in London. Governor Mark Carney will start a press conference 45 minutes later.

“Markets are getting excited as they have each time Carney has come out and given more of a firm lead on when they’re going to raise rates,” said Neil Mellor, a London-based senior currency strategist at Bank of New York Mellon Corp. “We’ve already had quite a tightening when it comes to sterling.”

The pound was at 69.84 pence per euro at 11:33 a.m. London time from 69.89 pence at Wednesday’s close. It touched 69.36 pence on July 17, the strongest since November 2007. Sterling was little changed at $1.5605, after climbing 0.3 percent on Wednesday.

Speculation that the U.K. will be among the first developed nations to increase borrowing costs has bolstered sterling, which is up against of its major counterparts this year except the Swiss franc.

Hawkish Voices

All but one of the 20 banks surveyed by Bloomberg predicted the Monetary Policy Committee’s votes would be split this week. More than half forecast two policy makers will vote for a rate increase, while six called for three votes and one predicted four officials will want to raise.

“There are quite a few who think that members will vote for higher rates,” said Steve Barrow, head of Group-of-10 strategy at Standard Bank Group Ltd. in London. “Were that to happen, it would still give sterling quite a significant lift.”

The central bank hasn’t raised its key rate since July 2007 and it has been at 0.5 percent since March 2009. Carney last month said the end of record-low rates was in sight and the time for such a move would become much clearer by the end of the year.

While none of 42 analysts surveyed by Bloomberg forecast any change at this meeting, traders have become increasingly bullish on the timing of higher borrowing costs in recent weeks. Forward contracts based on the sterling overnight index average, or Sonia, showing they predict rates will rise in May, three months earlier than implied as recently as July 10.

Under Pressure

That’s putting pressure on U.K. government bonds. The two-year gilt yield has more than doubled from this year’s low of 0.31 percent touched on Jan. 23. It was little changed at 0.66 percent Thursday.

The benchmark 10-year gilt yielded 1.99 percent, up from 1.58 percent at the end of March. The price of the 5 percent bond due in March 2025 was 126.16 percent of face value.

“You’re looking at that front part of the curve out to two years,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. “There will be quite a sharp reaction. If it’s a bit dovish, the longer end, having done extraordinarily well, could actually take quite a battering.”

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