Pound Ascent Has Carney in Quandary as Currency War Back in Play

  • Sterling posts weekly gains versus both euro and dollar
  • Money market signals no BOE liftoff until after January 2017

The pound’s appreciation this week may prompt the Bank of England to step up its dovish rhetoric.

Sterling posted it biggest weekly advance versus the dollar in two months. It touched its strongest level since August against the euro after European Central Bank President Mario Draghi Thursday kept the prospects of more stimulus alive in the face of low inflation and faltering economic growth.

A stronger currency is a challenge for the U.K. because it makes the economy less competitive. It lands BOE policy makers led by Governor Mark Carney with the tough task of finding a balance between signaling higher interest rates and reining in the pound.

“This is currency war,” said Neil Mellor, a senior foreign-exchange strategist at Bank of New York Mellon Corp. in London. “It’s very clear that the BOE has once more, for about the third time in the last two years, decamped from being on the fringes of hawkish territory. Once again sterling strength along with the turbulence in emerging markets” have compelled the BOE to back away from signaling imminent policy tightening, he said.

The pound appreciated 1.2 percent this week to 70.51 pence per euro as of 5:13 p.m. London time Friday. It touched 70.41 pence on Thursday, its strongest level since Aug. 19. Sterling rose 1 percent to $1.5211, the biggest weekly gain versus the dollar since Sept. 11.

The British currency stayed resilient even after Carney dealt a blow to sterling bulls on Nov. 5 by signaling that the BOE isn’t yet ready for tighter policy. Forward contracts based on the sterling overnight index average, or Sonia, aren’t pricing in any BOE interest-rate increase until after January 2017.

Data due Nov. 17 will show that U.K. inflation held below zero in October at an annual rate of minus 0.1 percent, according to a Bloomberg survey of economists. This will further strengthen the case for the BOE to maintain an accommodative policy stance for longer.

U.K. government bonds rose this week, with the 10-year yield falling six basis points, or 0.06 percentage point, to 1.98 percent. The 2 percent gilt due in September 2025 rose 0.515, or 5.15 pounds per 1,000-pound face amount, to 100.175. The Debt Management Office plans to sell 3.25 billion pounds of the benchmark 10-year securities on Nov. 18.