Pound Gains Come Easy as Market's Rate Outlook Remains Subdued

  • Forward contracts suggest no BOE rate increase until 2017
  • Sterling set for first weekly gain versus euro since mid-Sept.

It doesn’t take much to boost the pound these days. With the market not pricing in the first Bank of England interest-rate increase since the financial crisis until 2017, the U.K. currency has still gained against most other Group-of-10 currencies in a week that’s seen data generally disappoint economists’ forecasts.

Sterling posted its first weekly gain versus the euro since mid-September as speculation the European Central Bank will boost stimulus has weighed on the shared currency. Signs that the U.K.’s recovery may be losing momentum came as reports showed the inflation rate turned negative again and wage growth accelerated less than analysts estimated. BOE policy maker Kristin Forbes reiterated her view Friday that the next move in U.K. interest rates will be up and that it should happen “sooner rather than later.”

“We’re seeing a technical situation developing that’s interesting in euro-sterling as we’ve seen a pretty clear failure above 74” pence per euro, said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark. “Maybe we are looking at the end, in euro-sterling terms, of the weak-sterling phase.”

The pound strengthened 0.1 percent to 73.55 pence per euro as of 4:37 p.m. London time, extending this week’s advance to 0.8 percent. The U.K. currency depreciated to 74.93 pence per euro on Oct. 13, the weakest level since February. Sterling dropped 0.2 percent to $1.5435, paring its gain since Oct. 9 to 0.7 percent.

For the pound’s strength “to be more than just an uptick, we need to see a shift back to a pro-cyclical focus, starting to march those rate hikes back forward and some good data,” Saxo’s Hardy said.

Rate Outlook

Forward contracts based on the sterling overnight index average, or Sonia, suggested that a full 25 basis-point increase in the BOE’s key rate won’t come until after December 2016. The central bank’s official rate has been at a record-low 0.5 percent since March 2009 and the last increase came in 2007.

Britain’s domestic growth looks set to continue but at more moderate pace than previously expected, Forbes said. The U.K. may not be able to avoid the impact if the slowdown in emerging markets worsened, she said.

New BOE policy maker Gertjan Vlieghe said on Oct. 13 that he needed to see consumer-price growth pick up before voting for a rate increase and that the strong pound was acting as an adverse force against the economy.

The ECB meets next week to decide on monetary policy.

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