Pound Rises to Nine-Month High on Weak U.S. Inflation, BOE Talk

Updated on
  • Bank of England will be the next to raise rates: MUFG
  • Nomura sees ‘more than enough reason’ for improvement in pound

Blanchflower Sees Another Move Down Coming From BOE

The pound rose to its highest since September as weak inflation data in the U.S. weighed on the dollar, while traders are increasingly betting on tighter monetary policy in the U.K.

Sterling, which crossed $1.30 and rose against all of its major peers on Friday, has largely defied signs that the U.K. economy is slowing, with some Bank of England policy makers calling for higher rates. Prospects of another Federal Reserve hike meanwhile have fallen this week, with U.S. consumer price data falling short of analyst expectations, and Chair Janet Yellen striking a more dovish tone over two days in front of lawmakers.

“The outperformance of the pound does stand out,” said Lee Hardman, a London-based foreign-exchange strategist at MUFG, which forecasts the pound rising to $1.35 by the end of the year. “We think the Bank of England will be the next central bank to raise rates.”

  • GBP/USD climbs as much as 1.2% to 1.3093, its highest since September
  • EUR/GBP -0.69% at 0.8751, set for weekly decline of 1.1 percent
  • Short EUR/GBP “continues to look attractive even after the move lower and we continue to see the risk reward being in long GBP,” analysts at Nomura, including Jordan Rochester, write in a client note
    • “Rather than cutting our losses and stopping out of our EUR/GBP leg, we see more than enough reason to expect an improvement in sterling’s fortunes, or if anything a bias to expect further deterioration in EUR against GBP” into next week’s European Central Bank meeting
    • Nomura analysts say “expectations of a hawkish shift are high” from the ECB, without which the euro could weaken versus sterling. They also expect the BOE to raise rates in August
  • Markets currently price in about a 57 percent chance of a 25-basis-point hike by the end of this year, according to MPC-dated SONIA
  • Analysts at Citigroup Inc. differ from Nomura and don’t think the BOE can tighten policy in the face of a slowing economy
    • The big winner from that could be gilts, with Citi’s London-based strategist Jamie Searle predicting the spread of U.K. bond yields over their German peers could drop below 50 basis points, the lowest since 2013: chart
  • Yield on 10-year gilts rise 1 bp to 1.31%, little changed on week

— With assistance by Sejul Gokal, and Abigail Morris

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