Pound Jumps as Traders Call Rate-Divergence Wager Into Question

  • Reports on services cause surprise on both sides of Atlantic
  • Sonia forwards pricing no rate hike until beyond March 2017

The pound surged to a three-week high against the dollar as economic reports made investors more optimistic about the U.K. interest-rate outlook while chiming a note of caution about the U.S.’s.

Sterling rose more than 1 percent, only its second jump of that magnitude in 2016 on a closing basis, both of them happening this week. It took its first leg higher after data showed U.K. services growth unexpectedly accelerated in January, calling into question whether the market’s outlook for interest rates is too pessimistic.

Britain’s currency extended its gains as disappointing U.S. services data led futures markets to show a reduced likelihood the Federal Reserve will raise U.S. rates this year. Britain’s currency also strengthened versus the euro before the Bank of England announces its policy decision on Thursday.

“The BOE’s overall tone is likely to be dovish, signaling they are in no immediate rush to begin raising rates,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “That said, there might be some pushback against the current market pricing, which is too pessimistic. This could provide a temporary support for the pound. The rally was also partly explained by a sharp drop in U.S. non-manufacturing, which undermined the dollar.”

The pound rose 1.1 percent to $1.4575 at the 5 p.m. London close, and touched $1.4603, the highest since Jan. 11. Sterling was little changed at 75.85 pence per euro. 

‘Big Trouble’

The dollar was “in big trouble” Wednesday, John Hardy, head of foreign-
exchange strategy at Saxo Bank A/S in London, wrote in a note. The greenback
“was weaker across the board today and was the prime mover among major
currencies.”

With all 41 economists in a Bloomberg survey predicting the BOE will hold its official rate at a record-low 0.5 percent, focus will turn to the economic projections in the central bank’s quarterly Inflation Report, especially since the market has pushed back its pricing of the first U.K. rate increase in almost nine years to beyond March 2017 as the outlook for the global economy deteriorates.

U.K. government bonds climbed, with the benchmark 10-year gilt yield sliding two basis points, or 0.02 percentage point, to 1.53 percent. The 2 percent security due in September 2025 advanced 0.145, or 1.45 pounds per 1,000-pound face amount, to 104.21.

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