Pound Bulls Get Boost as Forbes Highlights Divergence With ECB

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Pound bulls got further encouragement from Bank of England policy maker Kristin Forbes, with comments highlighting that a policy divergence with the European Central Bank is intact.

Sterling reached its strongest level in two weeks against the dollar on Monday before retreating amid lower commodity prices. It was little changed versus the euro after Monetary Policy Committee member Forbes said in an article in the Daily Telegraph newspaper on Sunday that keeping interest rates at a record low for too long may damage the U.K.’s “solid” economic recovery. Last week, an account of the ECB’s July policy meeting showed officials described growth in the currency bloc as “disappointing.”

“The pound was boosted earlier this morning by relatively hawkish comments from MPC member Forbes,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “However, the weakness in commodity prices and concerns of weaker growth overseas have since dampened Bank of England rate-hike expectations, weighing on the pound.”

The pound was at 71.09 pence per euro as of 5:27 p.m. London time, after appreciating 0.6 percent in the previous two days. The U.K. currency has jumped 9.2 percent versus the euro this year, the best performer after the Swiss franc.

Sterling fell 0.3 percent to $1.5589, after earlier climbing to $1.5688, the highest since July 29.

Pound Appreciation

BNP Paribas SA recommended betting on the pound strengthening against the euro, with a target of 67.50 pence, a level not seen since September 2007. Analysts, led by London-based global head of foreign-exchange strategy Steven Saywell, wrote in a note that the BOE’s message for this month had been misinterpreted as overly dovish. In August, only one policy maker voted for an increase in interest rates.

The U.K. is enjoying a “solid recovery” and a delay in raising the benchmark interest rate, which has been at 0.5 percent for more than six years, could mean aggressive tightening later, Forbes said in the Daily Telegraph article.

“Maintaining interest rates at the current low levels during an expansion risks creating distortions,” she wrote. Waiting too long “would risk undermining the recovery –- especially if interest rates then need to be increased faster than the gradual path which we expect.”

The risks to the U.K. economic outlook “are less now than almost at any time I’ve been on the committee,” said BOE official David Miles, who leaves the MPC on Aug. 31.

Forward contracts based on the sterling overnight index average, or Sonia, signal a 25 basis-point increase next August, compared with May 2016 as recently as Aug. 11.

Inflation Data

Low levels of inflation have discouraged policy makers from raising interest rates. Traders will get further insight into the U.K. inflation outlook on Tuesday. Economists in a Bloomberg survey forecast that annualized consumer prices stagnated in July for a second month.

U.K. government bonds climbed with Treasuries and European securities as a drop in oil prices sapped the outlook for inflation, boosting demand for fixed-income assets. Gains extended after the U.S. Empire State manufacturing index slid to the lowest level since April 2009.

Benchmark 10-year gilt yields fell six basis points, or 0.06 percentage point, to 1.82 percent. The 5 percent bond due in March 2025 rose 0.595, or 5.95 pounds per 1,000-pound face value, to 127.80.

The 10-year break-even rate, a gauge of market inflation expectations derived from yield difference between gilts and index-linked securities, extended declines into a sixth week. The rate dropped three basis points to 2.57 percentage points.

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