Pound Gains Are Pricing in Rate Increase, Pimco’s Amey Says

Currency traders have priced in the effect of Bank of England interest-rate increases, potentially limiting the pound’s advance versus the dollar when borrowing costs do rise, according to Pacific Investment Management Co.

The U.K.’s currency has outperformed all 31 of its major peers in the past 12 months amid speculation economic growth will cause the central bank to bring forward rate increases. Policy maker Martin Weale said last month they will “come perhaps in the spring of next year.”

Now there are signs the rally is losing momentum. Sterling tumbled the most in four months against the dollar last week as Federal Reserve Chair Janet Yellen indicated U.S. borrowing costs may rise next year. The U.K currency declined to three-month low versus the euro last week.

“If recent rhetoric from the BOE is to be believed, they anticipate hiking rates over the first half of 2015,” Mike Amey, a London-based money manager at Pimco wrote in an e-mailed note. “The one part of the U.K. market that picked up on the about-turn in BOE rhetoric was the currency market, which at an exchange rate of about $1.65 has, in our view, already priced in much of the change in timing of U.K. rate hikes. It suggests that a further spike up in the pound is not that likely.”

Short Sterling

The pound was little changed at $1.6515 at 4:49 p.m. London time. It fell to $1.6460 yesterday, the least since Feb. 12. Sterling strengthened 0.4 percent to 83.58 pence per euro after depreciating to 84 pence on March 19, the weakest since Dec. 25.

The implied yield on short-sterling futures expiring in December was little changed at 0.76 percent. The rate on the March 2015 contract was 0.94 percent. The BOE’s key interest rate has been at a record-low 0.5 percent since March 2009.

The 10-year break-even rate, a gauge of inflation expectations derived from the yield difference between gilts and inflation-linked bonds, rose five basis points, or 0.05 percentage point, to 2.94 percent after declining to 2.84 percent on March 3, the lowest since January 2013.

Inflation Gauges

Retail-price inflation, the measure used as a basis for payments on inflation-linked bonds, slowed to 2.7 percent from 2.8 percent, the Office for National Statistics said today in London. Consumer prices rose an annual 1.7 percent, the least since October 2009, leaving the difference between the two measures at 1 percentage point, the most since March 2011, according to data compiled by Bloomberg.

Sterling has appreciated 9.7 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 8.1 percent and the dollar was lost 0.2 percent.

The U.K. currency rose for the first time in three days versus the euro after a measure of German business confidence declined, damping demand for the region’s shared currency.

The Ifo Institute’s business climate index for Europe’s biggest economy, based on a survey of 7,000 executives, fell to 110.7 in March after increasing to 111.3 the previous month, the highest level since July 2011. Economists surveyed by Bloomberg News predicted a decline to 110.9.

The 10-year gilt yield climbed two basis points, or 0.02 percentage point, to 2.71 percent. The 2.25 percent bond due in September 2023 fell 0.185, or 1.85 pounds per 1,000-pound face amount, to 96.195.

U.K. government bonds returned 2.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries earned 1.6 percent and German debt gained 2.4 percent.

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