Pound Seen Extending Rally After Dovish Fed Returns Focus to BOE

  • Credit Agricole sees sterling at 70 pence per euro by year-end
  • Gilts surge after Fed rates decision erases weekly declines

The pound may extend its gains after the Federal Reserve left interest rates near zero and struck a dovish tone in explaining itself, leaving the Bank of England as the only major central bank signaling clearly that it’s prepared to raise interest rates, according to Credit Agricole SA.

Sterling ended six weeks of declines against the euro as the European Central Bank’s readiness to extend its monetary stimulus contrasted with BOE Governor Mark Carney’s contention that officials may need to consider lifting U.K. borrowing costs early in 2016 if economic growth and inflation pressures pick up. ECB Executive Board member Benoit Coeure reaffirmed on Friday that the central bank is ready to extend its asset purchases beyond September 2016 if needed.

The pound extended its gains on Friday even after BOE chief economist Andy Haldane said the case for an increase in rates was some way off, citing downside risks to inflation from the slowdown in emerging markets and a stronger pound. Other members of the Monetary Policy Committee, including Kristin Forbes, have consistently said that rates may need to rise in the near future while Ian McCafferty has already voted for increases.

“Haldane is an important voice but not the only voice at the MPC,” said Valentin Marinov, head of Group-of-10 currency research at Credit Agricole’s corporate and investment-banking unit in London. “His views are not shared by the MPC hawks, who are getting increasingly vocal. Sterling long trades could start looking attractive yet again especially if we see more evidence that domestic demand remains quite resilient on the back of tightening labor market conditions and accelerating wage growth.” A long position is a bet that the price of a currency or asset will rise.

The pound gained 1 percent in the week to $1.5582 as of 5:23 p.m. London time, after a 1.7 percent advance in the previous week. Sterling appreciated 0.7 percent to 73.01 pence per euro, the first weekly increase since July 31.

The U.K. currency may advance to at least 70 pence per euro by year-end, Credit Agricole’s Marinov said.

Carney said Sept. 16 that the debate on when to raise the benchmark rate from 0.5 percent will become clearer around the turn of the year. If the economic expansion is above trend then the decision “comes into much sharper relief” then. Fed officials decided to keep their key rate at a zero to 0.25 percent range, citing uncertain growth outlook and recent financial turmoil.

U.K. government bonds surged on Friday after the Fed’s decision the previous day boosted sovereign bonds across the world. That left benchmark 10-year gilt yields little changed in the week at 1.83 percent.

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