Pound Strength Endures as BOE Helps Shift Focus Toward Economy

As the pound continued strengthening versus most of its major peers in the aftermath of the U.K. election, the Bank of England has helped shift investors’ focus to economic data.

Sterling posted its best week versus the euro in four months as data showed retail sales rebounded in April. Even a drop in inflation to below zero has not unnerved policy makers at the Bank of England, who said price growth should pick up “notably” at the end of 2015 and slack in the economy should be eroded within a year. A report next week will show the economy grew 0.4 percent in the first quarter, according to a Bloomberg survey of economists, faster than the 0.3 percent initial estimate last month.

“The pound should continue to derive support from the continued outperformance of the U.K. economy,” said Lee Hardman, a London-based strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. “We see the pound strengthening further against the euro and more broadly.”

Sterling appreciated 2.1 percent this week to 71.25 pence per euro as of 5 p.m. in London. Britain’s currency dropped 1.6 percent against the dollar to $1.5482, following two weeks of gains. The pound gained against 11 of its 16 major counterparts in the five days ended May 22.

The pound will advance to 67 pence per euro by year-end, Hardman said. However, it is likely to lag the performance of the U.S. dollar as the Federal Reserve moves closer to raising interest rates, he added.

Wages Report

BOE policy makers are watching wage data closely for signs that the economy is ready to withstand higher borrowing costs. Deputy Governor Minouche Shafik said on Friday that while wage growth has been weak since the financial crisis, recent data have been “more encouraging.” Markets are currently pricing the first 25 basis-point rate increase in July 2016, according to Sonia forward contracts.

The pound has become a favorite among a multitude of banks where foreign-exchange strategists are predicting strength in the currency that will push it past the strongest level versus the euro since 2007. On a trade-weighted basis, sterling appreciated to the highest level since August 2008 on Thursday.

U.K. 10-year government bonds declined for a sixth consecutive week. The yield rose five basis points, or 0.05 percentage point, to 1.93 percent. The 5 percent bond due in March 2025 fell 0.55, or 5.50 pounds per 1,000-pound face amount, to 127.265.

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