- BOE says higher rates coming, with ECB committed to stimulus
- U.K. inflation data scheduled two days before Fed decision
Currency traders who’ve so far been taking the Bank of England at its word and pushing the pound higher on prospects for higher interest rates probably will not be swayed by data showing inflation vanished last month.
Options trading show investors increased bullish bets on the pound against the euro for the first time in three weeks, before data on Sept. 15 that economists predict will show U.K. consumer prices stagnated in August. BOE policy maker Kristin Forbes said on Friday that new analysis about how the pound affects inflation means the central bank may need to start increasing interest rates sooner.
Sterling, which has been boosted by speculation that the BOE will be the next major central bank after the Federal Reserve to raise interest rates, was little changed in the week against the euro, as European Central Bank officials affirmed their commitment to stimulus. The Fed is scheduled to announce its rates decision on Sept. 17. The pound’s gain came as reports showing strength in the housing market countered other data showing a contraction in manufacturing and construction output.
“The market at the moment is not so much focusing on the timing, for good reason,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “What’s decisive is that the BOE in the foreseeable future will come into a situation where they will be able to normalize interest rates while that cannot be said about the ECB. They are at best remaining at the current stance, and more likely perhaps that they will even increase their expansionary policy.”
Sterling advanced 1.7 percent to $1.5433 versus the dollar as of 5 p.m. London time on Friday, the biggest weekly gain since June 19. The U.K. currency was little changed since Sept. 4 at 73.47 pence per euro.
Bank of England officials said Sept. 10 that the time for higher borrowing costs is getting nearer. The Office for National Statistics is scheduled to release a labor report on Sept. 16 that investors will scrutinize for the pace of wage growth. That’s a key gauge for the BOE as it assesses the appropriate timing for boosting official borrowing costs. Retail sales are due the following day.
Three-month risk-reversal rates show traders are paying a 0.23 percentage point premium for options to buy sterling against the common currency versus those allowing for sales, the first weekly increase since Aug. 21. The bias signals increased optimism that Britain’s currency will appreciate.
U.K. government bonds were little changed in the week, with the benchmark 10-year gilt yield at 1.83 percent. The price of the 2 percent bond due in September 2025 was at 101.55 percent of face value.