Pound Has Best Start to Year Since 2009 as U.K. Economy Expands

Not since 2009 has the pound begun the year so bullishly, a sign traders believe higher U.K. interest rates are coming.

Britain’s currency has gained 4 percent this year on a trade-weighted basis, as Bank of England officials said the next move in interest rates is likely to be up and that a slowdown in inflation is temporary. Sterling reached the strongest level in seven years against the euro on Thursday as data confirmed the U.K. gross domestic product grew for an eighth consecutive quarter. The pound touched an eight-week high versus the dollar.

“We’re still expecting a rate hike at some point and the GDP figure came out in line” with economists’ forecasts, said Harry Adams, head of trading at Argentex LLP, a currency advisory company in London. “As long as we stay on the same track, I don’t see the pound weakening off substantially.”

According to an index comprising the currencies of its major trading partners, the pound was set for its best start to a year since 2009, when it gained 5.8 percent in January alone. While other European central banks are easing monetary policy, the Bank of England has signaled that it is still moving toward its first rate increase since 2007.

The U.K. economy expanded 0.5 percent in the fourth quarter of 2014, matching an initial estimate, the Office for National Statistics said on Thursday. GDP increased 0.7 percent in the three months through September.

The pound appreciated 0.6 percent to 72.69 pence per euro as of 5:08 p.m. London time and touched 72.67 pence, the strongest since December 2007. Sterling fell 0.7 percent to $1.5425 after a report showed a core measure for U.S. inflation rose more than forecast and boosted the dollar against most of its major peers. The pound earlier climbed to $1.5552, the highest since Jan. 2.

Carney Testimony

In a testimony to U.K. lawmakers on Tuesday, BOE Governor Mark Carney said that officials can look through deviations in inflation that are largely caused by energy and food prices. Monetary Policy Committee member Martin Weale said that the benchmark rate may rise earlier than markets expect.

Investors are currently pricing in a 96 percent chance of a 25 basis-point increase in borrowing costs by April 2016, according to MPC-dated forward Sonia fixings. That assumes the current three basis-point spread for Sonia fixings below the Bank Rate would return to zero once the BOE raises rates.

U.K. government bonds snapped a two-day gain after the U.S. inflation data. They had been advancing with Treasuries since Federal Reserve Chair Janet Yellen said on Tuesday in testimony to U.S. lawmakers that a change in the central bank’s guidance won’t lock it into a timetable for raising interest rates.

Treasury Rally

“The Treasury market rallied post Yellen’s testimony and that also helped gilts but there are domestic reasons why gilts are remaining well underpinned,” said Jason Simpson, a fixed-income strategist at Societe Generale SA in London. “We haven’t had any issuance for two weeks so there is nothing to absorb. There is a positive tone out there on the domestic front due to the cash flows” as 5.3 billion pounds of coupon payments will return to the market on March 7, he said.

Benchmark 10-year yields rose one basis points, or 0.01 percentage point, to 1.73 percent, after declining eight basis points over the previous two days. The 2.75 percent gilt due in September 2024 fell 0.12, or 1.20 pounds per 1,000-pound face amount, to 108.9.

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