- Sterling advances versus all but two of its 16 major peers
- U.K. retail sales climbed most since December 2013 last month
The pound rose to its strongest level in a month against the euro as a report showed U.K. retail sales increased at a faster pace than economists forecast last month, strengthening the case that the economy would withstand the Bank of England raising interest rates sooner than is signaled by market pricing.
Sterling extended its gain, making it the biggest increase in more than five months, after European Central Bank President Mario Draghi said policy makers in December will reexamine the degree of economic stimulus they are providing. In the U.K., sales, including auto fuel, rose 1.9 percent from August, the biggest increase since December 2013, the Office for National Statistics said in London on Thursday. That was more than the 0.4 percent gain economists had forecast in a Bloomberg survey.
BOE Governor Mark Carney has said that the timing of a move in interest rates will become clearer at the turn of the year. Markets aren’t pricing in the first increase until 2017.
“There has been a degree of surprise with the strength of the September data,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. The data are “consistent with a consumer-driven recovery which is going to maintain itself into the start of the fourth quarter. That’s going to have some important implications for policy makers.” It also “should make the market have pause for reflection on how far out into the middle distance they’ve pushed the first rate hike,” he said.
The pound appreciated 1.6 percent to 72.38 pence per euro as of 5:36 p.m. London time, the biggest gain since May 8. Sterling fell 0.3 percent to $1.5378, falling for a third day.
Earlier this week, BOE official Ian McCafferty said that global threats to the U.K. economy hadn’t changed his view than interest rates needed to rise sooner rather than later. As the lone dissenter on the Monetary Policy Committee, he said there was so far little evidence that these risks were changing the outlook for U.K. growth.
A slowdown in emerging markets is weighing on Europe, the U.K.’s largest trading partner. Deflationary forces, particularly from China, have subdued market expectations for inflation globally and been part of the reason the BOE and Federal Reserve have held off from raising rates.
Draghi made his comments at his regular policy address Thursday, and said the growth prospects of emerging markets continue to signal downside risks to the outlook for growth and inflation in the euro zone.
“The robust domestic propensity to consume should keep the U.K. economy going despite persistent global economic headwinds and lingering policy uncertainty,” said Valentin Marinov, head of Group-of-10 currency research at Credit Agricole SA’s corporate and investment-banking unit in London.