Pound Extends Advance After Rate View Turns Hawkish: Inside U.K.

  • Sterling adds to biggest weekly gain of 2017 as dollar weakens
  • Morgan Stanley favors buying pound with $1.2900 target

BOE May Make Smaller Adjustments, Says RBC's Lignos

The pound strengthened, adding to this year’s biggest weekly gain, amid broad dollar weakness and after investors increased bets that the Bank of England will tighten policy as early as next year.

Sterling climbed for a fourth day in the longest winning streak since Dec. 5 and touched $1.2436, the strongest level since Feb. 28. Interbank investors bought the British currency at the start of London trading, according to a trader in Europe who spoke in condition of anonymity as the person is not authorized to speak publicly.

On charts, $1.2436 is the pound’s first technical resistance, which also represents the Ichimoku cloud top. If sterling breaks above that level, the next hurdle is at $1.2461, the 76.4 percent Fibonacci retracement of the currency’s decline from Feb. 24 through March 14.

Market pricing now implies around a 90 percent chance of the BOE raising rates by 25 basis points by September 2018. The odds were just 60 percent on Wednesday, a day before policy maker Kristin Forbes voted for a rate increase even as the central bank left borrowing costs unchanged in line with the bias of the other eight rate setters. Investors will look at U.K. data due this week, including inflation figures, to re-assess policy prospects.

“A week of soft U.K. data could give any lingering hawkish BOE hopes a harsh reality check,” strategists at ING Groep NV wrote in a note to clients. The bank is maintaining its strategy of selling sterling on any rally.

U.K. Prime Minister Theresa May will visit the Welsh city of Swansea on Monday as part of a tour that will also include Scotland and Northern Ireland to address their worries about Brexit. May is expected to trigger Article 50 of the Lisbon Treaty by the end of this month. Morgan Stanley doesn’t expect such a decision to come as a shock for markets, and favors buying the British currency with a target of $1.2900.

Ten-year gilts edged lower, with yields rising two basis points to 1.26 percent.

— With assistance by Sejul Gokal

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