Pound Jumps Most Since 2009 as BOE Damps Rate-Cut Speculation

BOE Alludes to 'Brexit' Threat in Holding Rate Steady
  • U.K. currency rises to highest in a month versus dollar
  • BOE leaves key rate at 0.5%, where it's been for seven years

The pound climbed the most since 2009 after the Bank of England’s minutes showed policy makers think interest rates will more likely than not rise in the next three years, damping growing speculation that its next move might have been a cut.

Sterling reversed a decline against the euro and strengthened versus 12 of its 16 major peers. The decision by all nine members of the Monetary Policy Committee, led by Governor Mark Carney, to leave the official rate at 0.5 percent was forecast by all 43 analysts in a Bloomberg survey.

“Some in the market were flagging there was a risk we could see a dissent in favor of a rate cut,” and sterling rose as those expectations were disappointed, said Sam Lynton-Brown, a foreign-exchange strategist at BNP Paribas SA in London.

The pound jumped 1.6 percent to $1.4492 as of 4:31 p.m. London time, its biggest advance since it rose 1.8 percent on Oct. 15, 2009. It touched $1.4502, the highest since Feb. 16. Sterling gained 0.8 percent to 78.11 pence per euro, climbing for the first time in four days.

‘Exaggerated Effect’

The central bank also said underlying growth of private domestic demand remains solid and predicted that a tighter labor market and rising productivity will underpin consumption.

“We think the market holds its shortest sterling exposure since 2008 -- that is since the financial crisis,” Lynton-Brown said, meaning that even marginally better news for the U.K. or the BOE could have an “exaggerated effect” on the currency. A short position is a bet a currency will fall.

Since last month’s BOE meeting “we have seen the currency soften, oil go up and markets calm down, so those three factors are suggestive of a more hawkish rather than a more dovish BOE,” he said.

The pound is still the worst-performing Group-of-10 currency over the past month amid concern Britain will quit the European Union after a June 23 referendum. The vote is also increasing the chance of a BOE rate cut in 2016, according to a monthly Bloomberg survey of analysts.

Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a 25 basis-point increase to the BOE’s official rate until 2017 at the earliest. Economists in the monthly Bloomberg survey put the likelihood of a cut this year at 23 percent, up from just 10 percent in February.

Bonds Rise

U.K. 10-year government bonds rose for a fourth day, with the benchmark gilt yield falling eight basis points, or 0.08 percentage point, to 1.45 percent. The 2 percent security due in September 2025 gained 0.675, or 6.75 pounds per 1,000-pound face amount, to 104.865.

Gilts -- and the pound -- were supported by the Federal Reserve’s policy statement Wednesday, when it said threats to global growth mean it will raise interest rates at a slower pace than previously anticipated. The dollar slid versus all of its major peers.

Gilts were “driven by the dovish statement and press conference given by the Fed,” said Jason Simpson, a London-based fixed-income strategist at Societe Generale SA. “We are constructive on bonds and we think yields will continue to fall.”

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