Pound Rallies as Global Markets Stabilize Before BOE Meeting

Updated on
  • Central-bank rates decision, minutes scheduled for Sept. 10
  • Slide had come as speculators reversed bullish positions

The pound advanced for the first time in 10 days against the dollar, ending its longest losing streak since 2008, as optimism that stability may be returning to China’s stock market eased concern that the U.K. economic recovery will be derailed.

Sterling gained versus all of its 16 major counterparts as investors looked forward to the Bank of England’s monetary-policy decision later in the week. That’s when the focus will center on minutes of BOE discussions for clues on when rate increases may start. The pound advanced from an almost four-month low against the dollar, ending a slump that had coincided with speculators reversing bullish bets by the most in nearly a year.

Sterling slumped last week after reports from manufacturing to services signaled a slowdown, prompting money-market traders to pare back tightening expectations even after BOE Governor Mark Carney said Aug. 29 that market turmoil hadn’t pushed back the prospect for higher borrowing costs. Other reports this week will show rebounds in house prices and industrial production, according to the median estimate of economists in Bloomberg surveys.

“The data was somewhat weaker than expected of late but it seems like what happened in the rates market, with investors paring back rate-hike expectations, may have been a bit excessive.” said Valentin Marinov, head of Group-of-10 currency research at Credit Agricole SA’s corporate and investment-banking unit in London. “So long as risk sentiment continues to stabilize and we see the BOE still on course to deliver rate hikes at some point in the future, the pound could start regaining some ground against low-yielding G-10 currencies. Euro-sterling is starting to look like an interesting selling opportunity.”

The pound climbed 0.7 percent to $1.5270 as of 4:16 p.m. London time, the biggest increase since July 14. That’s after a weekly decline of 1.4 percent that pushed it to its weakest level since May 7. The U.K. currency strengthened 0.5 percent to 73.10 pence per euro, after sliding 0.8 percent on the previous trading day. Sterling gained the most versus the South Korean won.

Hedge funds and other large speculators pushed net wagers on a pound-dollar drop to 11,239 contracts in the week ended Sept. 1, compared with 3,299 on a gain in the prior week, according to the Commodity Futures Trading Commission in Washington. That’s the biggest turnaround since the period through Sept. 16, 2014, when campaigning before Scotland’s independence referendum was approaching its final stages.

While there is no urgency for a rate increase, the turn of the year is still “the point where they’ll start thinking about rate rises, February is certainly on the cards,” former Bank of England policy maker Kate Barker said in a Bloomberg Television interview Monday. Forward contracts based on the sterling overnight index average, or Sonia, suggest that a full 25 basis-point increase won’t come until beyond October 2016.

Government bonds rose, extending gains that have delivered returns of 1.3 percent in the past month, compared with an average loss of 0.2 percent among euro-area counterparts.

Benchmark 10-year gilt yields dropped two basis points, or 0.02 percentage point, to 1.81 percent. The 2 percent bond due in September 2025 rose 0.16, or 1.60 pounds per 1,000-pound face amount, to 101.745.