Pound's Prospects Look Better Than Fed Week Would Normally Imply

  • Sterling may advance to $1.54 by end of next week: Nordea
  • U.K. inflation forecast to turn positive; wages seen growing

The pound is shaping up to approach the year-end on a positive note versus the dollar, even with the Federal Reserve set to raise interest rates for the first time in almost a decade.

A string of reports are due to show an improvement in the U.K. economy next week with, crucially, inflation set to turn positive, according to analysts surveyed by Bloomberg. Given the Fed’s repeated hints that it will raise rates at its Dec. 15-16 meeting, the prospect is largely priced into markets. Sterling has risen against its U.S. counterpart for the past two weeks as the final U.S. policy meeting of 2015 approaches.

“Inflation figures next week are key,” said Aurelija Augulyte, a senior foreign-exchange strategist at Nordea Markets in Copenhagen. “Core inflation has been pressured down by past pound strength, but now the effect is fading. Earnings growth should also keep above the 2 percent-per-annum pace, so faster than in the U.S. All in all, pound-dollar strength.”

The pound rose 0.6 percent this week to $1.5206 as of 5 p.m. London time, up from a more than seven-month low of $1.4895 on Dec. 2. It may climb to as high as $1.54 by the end of next week, Augulyte said. Sterling slipped 0.4 percent to 72.29 pence per euro, its third week of declines.

Economic Advances

Retail sales increased in November after shrinking the previous month, while average weekly earnings rose, economists predict.

Weak or negative consumer-price growth in recent months has stopped the BOE from signaling an imminent increase to its 0.5 percent main interest rate, and markets aren’t fully pricing in the first move higher until 2017, futures data compiled by Bloomberg show.

At their policy meeting this week, BOE officials voted 8-1 to keep borrowing costs at a record-low, citing weak oil prices which are damping the inflation outlook.

U.K. bonds gained this week as a drop in commodities worsened the outlook for consumer-price growth and solidified speculation that interest-rate increases are still some way off.

Benchmark 10-year yields fell 11 basis points, or 0.11 percentage point, to 1.81 percent. The 2 percent gilt due in September 2025 rose 0.975, or 9.75 pounds per 1,000-pound face amount, to 101.67.

“A dovish hike from the Fed is priced in, so if that is delivered there is no support from the dollar side and markets may start repricing the BOE,” Nordea’s Augulyte said.

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