Pound Holds Gain Before Retail Sales Seen Boosting Rate Outlook

  • McCafferty says central bank risks being `behind the curve'
  • Market pricing next BOE rate increase after December 2016

The pound held gains against the dollar before retail sales data this week that are forecast by economists to show an increase, supporting the case for the Bank of England to raise rates sooner than the market expects.

BOE policy maker Ian McCafferty said the central bank risked being behind the curve on the interest-rate path and that an increase is needed now to ensure gradual gains later. McCafferty was the only member of the Monetary Policy Committee to vote for an increase this month.

The market isn’t pricing in the first move until beyond December 2016. Traders were also waiting for BOE Governor Mark Carney to outline the central bank’s view on Wednesday on how Britain’s membership in the European Union affects the economy and banking industry.

“The bar is still pretty low” for pound gains “given the tightening cycle is only priced to begin in 2017,” said Josh O’Byrne, a London-based currency strategist at Citigroup Inc. “Carney’s comments tomorrow will attract some focus, but retail sales is likely to be the bigger mover. There, we’re fairly upbeat.”

U.K. retail sales, including auto fuel, rose 0.4 percent in September, after a 0.2 percent increase the previous month, the Office for National Statistics will say on Oct. 22, according to the median forecast of economists in a Bloomberg survey.

The pound was little changed at $1.5464 as of 4:33 p.m. London time. It has gained 2.2 percent this month. Sterling weakened 0.1 percent to 73.35 pence per euro.

Euro Advances

The euro was supported as the European Central Bank said lending conditions largely continued to improve in the third quarter, damping speculation that officials will extend their asset-purchase program.

ECB policy makers meet on Oct. 22 amid signs in government-bond and money markets that traders are pricing in the possibility of additional stimulus from the central bank. Officials have said since the last meeting on Sept. 3 that they are ready to act if the outlook for growth and inflation continued to deteriorate.

“Fearing a more dovish ECB message, we still like to be long pound-dollar and short euro-pound,” Citi’s O’Byrne said. A long position is a bet the asset’s price will increase.

Morgan Stanley analysts expect the pound to extend its gains in the near-term and reach $1.58 in the next few months.

“The pound is poised to benefit from the broader, more positive risk environment which is currently developing,” the strategists, led by Hans Redeker, the London-based head of global currency strategy, wrote in a note. “Data-wise, this week should see the U.K. retail sales showing a renewed rebound for September.”

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