Pound's Resilience Shines Through as Britain's Outlook Sours

  • Sterling trade-weighted index reaches highest since August
  • Pound set for 2nd weekly gain versus euro after Draghi speech

The pound is largely resilient in the face of the U.K.’s uneven economic recovery.

A trade-weighted index of the currency reached its highest level since August this week, even after reports showed October retail sales fell more than economists forecast, inflation stayed below zero and Britain recorded the largest budget deficit for any October since 2009.

A stronger currency potentially could derail the U.K.’s fragile growth. Bank of England Governor Mark Carney has the tough task of signaling higher interest rates while at the same time trying to curb the pound’s appreciation, especially as the euro is being driven down by an increasingly dovish European Central Bank.

“Even if the BOE is pushed out of its comfort zone with a stronger sterling, there is little Carney can do,” said Ipek Ozkardeskaya, a market analyst at London Capital Group. “On a trade-weighted basis, the pound has more to gain,” she said, adding that the focus is “mainly on how far could the ECB can expand. Cheaper the euro, happier the ECB.”

Sterling appreciated 0.1 percent to 70.11 pence per euro as of 4:42 p.m. London time, advancing 0.8 percent in the week. The U.K. currency touched 69.83 pence on Nov. 18, its strongest level since Aug. 6.

The pound fell 0.6 percent to $1.5199 on Friday, pushing it into a loss for the week. Two days earlier, a Deutsche Bank AG trade-weighted measure of the pound reached its highest since Aug. 18, based on closing prices.

Dovish Draghi

Since slipping to its weakest level in eight months on Oct. 13, the pound has appreciated about 7 percent against the euro. Britain’s currency strengthened for a second week versus the single currency after ECB President Mario Draghi said on Friday officials will do what’s necessary to “raise inflation as quickly as possible.” In contrast to the ECB, BOE officials are debating when to lift interest rates off their record lows, even though investors remain skeptical they will do so in 2016.

“The BOE is going to hike rates while the ECB is still trying to talk down its currency,” said Stuart Bennett, London-based head of Group-of-10 currency strategy at Banco Santander SA. He said even if the BOE don’t raise rates in February next year, as he predicts, they will go “sooner than the market expects and that isn’t in the price.”

While forward contracts based on the sterling overnight index average, or Sonia, aren’t pricing in a rate increase until after January 2017 by the BOE, its monetary policy path stands in contrast to that of the ECB’s, which is discussing expanding a 1.1 trillion-euro quantitative-easing program. 

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