Pound Advances on BOE Rate Signals as Goldman Sees More Gains

The pound reached a seven-week high against the dollar as central bankers on both sides of the Atlantic signaled moves toward interest-rate increases, though the Federal Reserve said it would avoid giving a timetable.

Sterling touched a seven-year high against the euro, as Goldman Sachs Group Inc. said it will appreciate further. Bank of England’s Martin Weale said on Tuesday that rates may need to rise earlier than markets expect. The U.K. currency was the biggest gainer in the past month among 10 developed-market currencies tracked by Bloomberg Correlation Weighted Indexes even as opinion polls showed the May 7 general election is unlikely to give any party a majority. U.K. government bonds rose for a second day.

BOE policy makers’ comments “still leave us comfortable that sterling has a little further to appreciate, and we continue to favor euro-sterling going lower as well on a broad recovery story,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “It’s a question of how far we can go before we start to run into a degree of political risk. That will be the caveat that precludes sterling rallying too far.”

The pound rose 0.3 percent to $1.5492 at 4:45 p.m. London time and earlier touched $1.5539, the highest since Jan. 2. Sterling appreciated 0.1 percent to 73.31 pence per euro and touched 73.14 pence, the strongest since January 2008.

CIBC recommends buying the pound, with a target of $1.5620, Stretch said.

Inflation View

BOE Governor Mark Carney reiterated on Tuesday in testimony to U.K. lawmakers that the drop in inflation is temporary. Federal Reserve Chair Janet Yellen said the same day that a change in the central bank’s guidance won’t lock it into a timetable for raising interest rates. While she made clear no rate increase is imminent, she told the Senate Banking Committee that the economy is on solid ground and she saw hints wages may be starting to pick up.

Goldman Sachs has raised its forecast for pound strength against the euro. In the next three, six and 12 months the pound will appreciate to 72 pence, 70 pence and then 68 pence per euro, respectively.

“The market is underpricing the risk of earlier rate hikes in the U.K.,” analysts including senior foreign-exchange strategist Robin Brooks, wrote in a note to clients. “Sterling should continue to outperform the euro as interest rate differentials continue to swing in its favor. We think the resilience of the U.K. macro data will trump election concerns.”

Volatility Increase

Three-month implied volatility of the pound versus the dollar has increased this year by almost 30 percent, more than any of its 15 other peers, as the U.K. election draws closer.

Surveys from the most prolific polling company, YouGov Plc, over the past week have shown Prime Minister David Cameron’s Conservatives and the main opposition Labour Party neck and neck at support levels of 32 percent to 34 percent. YouGov predictions still show both parties will not win enough seats to secure a parliamentary majority.

Ten-year gilt yields fell four basis points, or 0.04 percentage point, to 1.72 percent, after declining four basis points a day earlier. The 2.75 percent bond due in September 2024 rose 0.37, or 3.70 pounds per 1,000-pound face amount, to 108.995.

Data on Thursday will show the U.K. economy grew 0.5 percent in the fourth quarter, according to economists surveyed by Bloomberg. That would match an initial estimate and represent a slowdown from the 0.7 percent expansion of the previous quarter.

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