Pound Rises Versus Euro as Yellen Revives Policy Tightening View

  • Sterling climbs from one-month low against shared currency
  • U.K. government bonds set for biggest drop in a month

The pound strengthened for the first time in four days against the euro after Federal Reserve Chair Janet Yellen said the U.S. central bank was on course to raise interest rates this year, boosting speculation the Bank of England will follow.

Sterling rose from a one-month low versus Europe’s shared currency as Yellen firmly placed herself in the camp of those Federal Open Market Committee officials who favor the Fed increases its benchmark interest rates from record lows in 2015. U.K. 10-year government bonds were set for the steepest decline in a month as BOE policy maker Ian McCafferty said it was time for the process of rate normalization to begin.

“The markets are getting a little bit more confident that the Fed will hike rates before the end of this year,” said Stuart Bennett, London-based head of Group-of-10 currency strategy at Banco Santander SA. “The general view is that the BOE won’t be far behind. So the euro gets squeezed against the dollar and then against sterling.”

The pound strengthened 0.3 percent to 73.44 pence per euro at 1:21 p.m. London time. It dropped 2.1 percent over the previous three days and depreciated to 74.11 pence on Thursday, the weakest level since Aug. 24. Sterling fell for a sixth day versus the dollar, slipping 0.4 percent to $1.5176.

Benchmark 10-year gilt yields rose nine basis points, or 0.09 percentage point, to 1.84 percent. That would be the biggest increase since Aug. 25. The 2 percent bond due in September 2025 fell 0.785, or 7.85 pounds per 1,000-pound face amount to 101.445.

BOE Liftoff

Implied yields on short-sterling futures contracts expiring in September 2016 rose five basis points to 86 basis points. That’s a sign investors are increasing wagers on higher inter-bank borrowing costs. The U.K. central bank has held its main interest rate at a record-low 0.5 percent since March 2009.

Investors had been pushing back prospects of a move by the BOE since the Fed refrained from tightening policy on Sept. 17 citing the turmoil in emerging markets.

Analysts at UniCredit Bank AG, led by Vasileios Gkionakis, London-based head of global foreign-exchange strategy, said that markets are “pricing too large a gap between the liftoff dates of the Fed and the BOE.”

“We think the BOE will follow the Fed much more swiftly than the market currently anticipates,” they wrote in a note to clients, adding that they forecast the BOE to increase interest rates in February after the Fed moves in December this year.

McCafferty, a member of the BOE’s rate-setting Monetary Policy Committee said on Thursday that it was appropriate to move from emergency rates. He forecast inflation to rise back to 2 percent by this time in 2017. He was the lone dissenter among the nine-member MPC at the previous two policy meetings, when he voted for higher borrowing costs.

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