Pound’s Best Week in Month Spurred by Higher-Rates Speculation

The pound had its best week against the euro in more than a month as the Bank of England reiterated that the U.K. was still on course for higher interest rates.

Sterling reached a seven-year high versus the common currency on Friday and gained for a fifth week against the dollar. Data confirmed the previous day that the U.K. economy grew for an eighth consecutive quarter. Ten-year government bonds declined for a fourth week. Gilts were the worst performing sovereign securities in the past month.

“The pound has performed well so far this year, supported by evidence of continued strong cyclical momentum in the U.K. economy,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “There is the possibility still that the Bank of England could begin to raise rates by the end of this year or early next year, which is not fully discounted by the market yet, and that could be a trigger for further pound upside.”

The pound appreciated 1.9 percent to 72.52 pence per euro this week through 5 p.m. London time Friday, having touched 72.51 pence, the strongest since December 2007. Sterling rose 0.3 percent to $1.5441. It reached $1.5552 on Feb. 26, the highest since Jan. 2.

Goldman Sachs Group Inc. 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.

Best Start

The U.K. currency is having the best start to the year since 2009 on a trade-weighted basis amid speculation higher interest rates are coming. BOE Governor Mark Carney told lawmakers on Tuesday that officials can look through deviations in inflation that are largely caused by energy and food prices. Fellow Monetary Policy Committee member Martin Weale said that the benchmark rate may rise earlier than markets expect.

Next week, Bank of England officials meet to decide on monetary policy. All 51 economists in a Bloomberg survey forecast interest rates to be held at 0.5 percent, where they have been since 2009.

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

Ten-year gilt yields rose 3 basis points, or 0.03 percentage point, to 1.8 percent from Feb. 20. The 2.75 percent gilt due in September 2024 fell 0.3, or 3 pounds per 1,000-pound face amount, to 108.31. The debt lost 2.7 percent in the past month through Thursday, according to Bloomberg World Bond Indexes. Treasuries shed 1.1 percent, compared with an average 0.9 percent return by euro-area government securities.

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