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Pound Gains Versus Dollar as Traders Await Signs From BOE, Data

  • New BOE official Gertjan Vlieghe due to speak on Tuesday
  • Sterling approaches three-week high against U.S. currency

The pound rose against the dollar, approaching its strongest level in three weeks, as traders awaited further clues from Bank of England policy makers on the timing of their first interest-rate increase since the financial crisis.

Sterling halted two days of declines against the euro before data this week that economists said will show Britain’s inflation rate held at zero while wage growth accelerated. BOE officials Gertjan Vlieghe and Ian McCafferty will testify to U.K. lawmakers on Tuesday. While McCafferty has voted to raise borrowing costs at the past three meetings, former hedge-fund economist Vlieghe only joined the MPC last month and these will be his first public comments as a rate setter.

U.K. break-even rate shows changes in market inflation expectations
U.K. break-even rate shows changes in market inflation expectations

“We expect U.K. data flow this week to be supportive for the pound, with our economists’ forecasts above consensus,” said Sam Lynton-Brown, a London-based foreign-exchange strategist at BNP Paribas SA. “The market is under-pricing BOE rate-hike prospects and FX investors are not positioned for pound strength. There’s plenty of scope for U.K. front-end rates to move higher and for the pound to strengthen in response to better data.”

Sterling weakened versus all but two of its 16 major peers last week after the BOE said in the minutes of its latest policy meeting that there’s scope to keep interest rates low as slow inflation persists. The central bank has kept it official rate at 0.5 percent since March 2009. McCafferty argued that domestic price pressures are building and inflation will overshoot the central bank’s 2 percent target in the medium term.

The pound rose 0.1 percent to $1.5340 as of 4:14 p.m. London time, after climbing Friday to $1.5383, the highest level since Sept. 22. Sterling strengthened 0.2 percent to 74.04 pence per euro.

Monetary Policy Committee member Martin Weale said in a speech at the University of Groningen in the Netherlands on Monday that productivity in the U.K. has begun to improve and that Europe may be able to avoid a secular stagnation. Last month Weale said Britain’s rates needed to rise “relatively soon.”

“It’s primarily the U.S. dollar that’s softening up, but it’s also potentially some anticipation of today and tomorrow’s BOE speakers” that’s behind sterling’s gain, Josh O’Byrne, a London-based currency strategist at Citigroup Inc. said before Weale’s speech. “Citi expect inflation will be higher than consensus, perhaps enough to offset any more dovish commentary from new MPC member Vlieghe.”

Britain’s currency may appreciate to $1.55 in the next month, Citigroup’s O’Byrne said.

The dollar weakened against most of its major counterparts Monday amid speculation the Federal Reserve will hold off on raising interest rates until 2016. This has also helped push back pricing on the first BOE increase to 2017.

Revised Forecast

HSBC Holdings Plc reduced its forecast for the pace of U.K. rate increases, seeing only 50 basis points, or 0.5 percentage point, of tightening in 2016 and 2017.

The BOE is still too optimistic on growth, Simon Wells, chief U.K. economist at HSBC, wrote in a note. The “natural” interest rate -- the rate required for the economy to be growing at its potential pace with stable inflation -- will be as low as 1 percent long-term, down from 3 percent before the financial crisis, he wrote.

“A slower pace of tightening is also warranted in light of increased uncertainty surrounding global demand and evidence of a risk that U.K. growth could slow more in the second half than we (and the MPC) are currently expecting,” Wells wrote. HSBC previously forecast the BOE rate to increase by 75 basis points in 2016.

U.K. government bonds climbed, with the 10-year yield dropping four basis points to 1.83 percent. The 2 percent gilt due in September 2025 rose 0.325, or 3.25 pounds per 1,000-pound face amount, to 101.565.

The yield curve has steepened as investors reduced their outlook for higher borrowing costs in the near term, pushing down the yields on shorter-dated gilts faster than those on their longer-maturity peers.

The yield difference, or spread, between five- and 30-year gilts touched the widest level since February at the end of last week. The gap was at 136 basis points Monday after reaching 137 on Friday.

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