Pound Rallies as Currency Traders Harden to Low-Rate Speculation

For the past five weeks, selling the pound on the view that U.K. interest rates won’t budge has been a profitable trade. That’s now fizzling.

The pound rose against the dollar for a third straight day, even as U.K. government bonds advanced following a report that showed a surprise drop in investment and a slump in exports. Sterling gained 1.2 percent since dropping to a 14-month low last week, a sign to some that the possibility of another year of record-low interest rates is already factored into the price.

“Expectations have shifted so massively that the potential for surprises on the downside are quite limited,” said Ulrich Leuchtmann, the head of currency strategy at Commerzbank AG in Frankfurt. “This change in monetary policy is becoming a little bit off the table as a main driver for sterling.”

The pound rose against 14 of its 16 major counterparts today. It added 0.5 percent to $1.5791 at 4:23 p.m. London time and has rallied from as low as $1.5590 on Nov. 14, the weakest level since Sept. 6, 2013. Sterling appreciated 0.2 percent to 79.22 pence per euro, its first gain in three days.

Britain’s currency tumbled 2.7 percent versus the dollar in the five weeks through Nov. 21. At the same time the yield on 10-year gilts fell to 2.05 percent from 2.19 percent, a sign traders were adding to bets on lower borrowing costs.

Economic Data

Household spending rose 0.8 percent in the third quarter from the previous three-month period, the most since the second quarter of 2010, the Office for National Statistics said today in a report that also confirmed the economy expanded 0.7 percent in the third quarter. Business investment fell 0.7 percent, the first decline in more than a year, and exports dropped 0.4 percent, compared with the median prediction for a 0.1 decline in a Bloomberg survey of economists.

The reports may help explain why most Bank of England policy makers are arguing to keep down interest rates and support the U.K.’s 1.7 trillion-pound economy. At the same time, their efforts are helping to push government bonds higher, together with concern that the U.K. risks infection from stagnation in the euro area, its top trading partner.

Ten-year gilt yields fell four basis points, or 0.04 percentage point, to 1.98 percent, the lowest since Oct. 16. The 2.75 percent gilt due in September 2024 rose 0.315, or 3.15 pounds per 1,000-pound face value, to 106.86.

Europe Risk

“The risk -- and I think this is something that we are seeing in market pricing -- is that the euro zone stays weak and the U.K. converges to the euro zone by drifting lower,” said Joakim Tiberg, a rates strategist at UBS AG in London. “That would be a very negative scenario. If that plays out we might see a very bullish gilt-market reaction.”

Sterling was little changed yesterday even as BOE Governor Mark Carney told lawmakers that increases in borrowing costs would likely be limited and gradual. The U.K. still “requires monetary stimulus to grow above trend and bring inflation back to target,” Carney said in his testimony to Parliament’s Treasury Committee.

Forward contracts based on the sterling overnight interbank average, or Sonia, show traders have delayed bets for a 25 basis-point increase in the U.K. benchmark rate to beyond October. Three months ago, the market was priced for an increase in February.

There may have been stop losses at about $1.5750, helping to accelerate gains by sterling today, said Graham Davidson, a currency trader at National Australia Bank Ltd. in London. Stop losses are automatic instructions to exit a trade if a bet goes the wrong way.

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