Pound Resilience Shows House-Price Drop No Barrier to Rate Bets

The pound was about 0.4 percent from a 22-month high versus the euro amid bets a cooling housing market won’t be enough to prevent the Bank of England from being the first major central bank to increase interest rates.

Sterling was little changed versus the dollar after Rightmove Plc said house prices in England and Wales fell for the first time this year in July. The pound has been the best-performer in the past 12 months among a basket of 10 major currencies as a strengthening economy spurred bets central-bank officials led by Governor Mark Carney will increase borrowing costs in the first half of 2015. U.K. government bonds were little changed before a sale of 10-year debt tomorrow.

“Little has changed in terms of the structural direction and there should be further pound strength ahead,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “There is some profit taking on long sterling positions, some of the housing data may be coming in a little bit on the lighter side given the previous performance. But there’s more to come, there’s an underlying bid to the pound.”

A long position is a bet an asset’s value will increase.

Sterling was at 79.24 pence per euro at 5 p.m. London time after touching 78.89 on July 17, the strongest level since September 2012. The pound was little changed at $1.7066. It appreciated to $1.7192 last week, the highest since October 2008.

Home Values

House prices fell 0.8 percent from a 0.1 percent increase in June, Rightmove said today.

Carney said in a June 12 speech that investors were underpricing the risk of a U.K. rate increase this year, prompting institutions from Deutsche Bank AG to Credit Suisse Group AG to bring forward forecasts for the timing of the first move.

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting U.K. borrowing costs will increase 25 basis points by February. The U.K.’s benchmark interest rate is at a record-low 0.5 percent, compared with 0.15 percent in the euro area.

The pound rose 11 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 1.2 percent, while the dollar fell 2 percent.

The yield on benchmark 10-year gilts was at 2.57 percent. The price of the 2.25 percent bond maturing in September 2023 was 97.44.

Gilts returned 4.4 percent this year through yesterday, Bloomberg World Bond Indexes show. That compares with a gain of 5.5 percent for German securities and 3.4 percent for Treasuries.

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