Pound Surge Stokes Bullish Option Bets as BOE Rate Hike in Cards

Updated on
  • Bank committee’s comments ‘suggest it was a closer call’: RBC
  • Sentiment turns bullish for first time since February 2014

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For investors bullish on the pound, the story hasn’t been this compelling in a long time.

Sterling surged to the highest in a year against the dollar as the Bank of England signaled Thursday it could raise interest rates sooner than thought. That prompted investors in the money market to bring forward the pricing for the first increase to February, a full year earlier than at the end of last week. In the options market, the cost of call options on the pound relative to puts soared to the steepest in more than three years.

The BOE’s Monetary Policy Committee voted 7-2 to keep the key interest rate at a record-low 0.25 percent, and said some withdrawal of monetary stimulus was likely to be appropriate over the coming months to return inflation sustainably to target.

“This clearly at the margin makes a move in November more likely, but it depends on what happens to the data between now and then,” said John Wraith, the London-based head of U.K. rates strategy and economics at UBS Group AG. “For now they are obviously determined to try and get more traction in the market, which they’ve been hoping to do and I think this move can extend a little bit.”

Sterling rose as much as 1.4 percent to $1.3395, the highest since September 2016, and strengthened by 1.4 percent to 88.70 pence per euro. The yield on benchmark 10-year gilts climbed eight basis points to 1.23 percent, its highest level since Aug. 3.

The pound, the world’s best-performing major currency this month, gained on expectation of a more hawkish tone from the central bank following a pickup in inflation data on Tuesday. That was tempered by jobs data on Wednesday showing low unemployment failing to feed through to faster wage growth, but the central bank’s comments appeared to suggest it was willing to look past sluggish wages.

The implied probability of a 25-basis-point-rate increase by November this year rose to 50 percent following the meeting, compared with 40 percent before the BOE announcement, according to MPC-dated SONIA.

“The comment that most see scope for stimulus reduction in the coming months suggests it was a closer call than the 7-2 vote would suggest,” said Royal Bank of Canada currency strategist Adam Cole.

— With assistance by David Goodman, and Vassilis Karamanis

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