Pound Climbs on Hawkish BOE Tilt as 2018 Rate-Rise Bets Increase

  • BOE’s Forbes vote to lift rates drives pound higher this week
  • Gilts fall, selling in sterling interest-rate futures

BOE May Make Smaller Adjustments, Says RBC's Lignos

Sterling headed for its first weekly gain since February and gilts declined as market expectations shifted toward tighter policy in the U.K.

The Bank of England’s rate meeting signaled the potential for increasing hawkishness, with the pound “under-owned following a momentous post-Brexit slide,” according to Steen Jakobsen, chief economist at Saxo Bank A/S. Market pricing now signals around a 95 percent chance of a 25-basis-point rate increase by September 2018, compared with just 60 percent on Wednesday.

The pound has been prone to large swings this week, often without obvious catalysts, a trend that continued on Friday as it earlier slid 25 pips within a minute against the dollar. That was mainly driven by corporate demand for the U.S. currency and algo buying across the board, according to two Europe-based traders who asked not to be named as they were not authorized to speak publicly.

It dipped again from session highs after European Union officials said the bloc will only discuss transitional Brexit arrangements and a potential U.K. trade deal if the British government agrees to pay an exit bill.

  • The pound rose versus most of its G-10 peers this week. It advanced after BOE policy maker Kristin Forbes voted for an interest-rate increase on Thursday, a dissenting voice that caught some in the market by surprise
  • Earlier in the week sterling appreciated against the dollar after the Federal Reserve indicated it would maintain a gradual path of policy tightening, proving less-hawkish than some had expected
  • Saxo’s Jakobsen remains “constructive on GBP in the long-term, i.e., more than nine months, despite all of the headlines concerning the European Union”
  • Analysts at Julius Baer differ, saying they see Brexit negotiations hurting the pound
    • “The slightly hawkish BOE tone offered the pound some short-term stability, but we do not buy into policy tightening anytime soon,” writes economist David A. Meier in a client note
    • “Brexit will begin to bite with crumbling foreign-direct investments exposing the U.K.’s large current-account deficit. We stick to our bearish 12-month outlook of EUR/GBP 0.92”
  • GBP/USD trades little changed at 1.2354 after high of 1.2399; set for a 1.5% weekly gain after a 2.4% decline in the previous two weeks
  • The pair is facing strong headwinds within 1.2376-1.2410, Bloomberg technical analyst Sejul Gokal writes
  • EUR/GBP falls 0.2% to 0.8691
  • Gilt 10y yield up 1bps to 1.26% after rising to 1.29%, set for 3bps weekly advance