Pound Climbs After U.K. Services Data Support BOE Rate Hike

Updated on
  • Rebound from four-week low may be ‘relief rally’: MUFG
  • Sterling extends rally after U.S. payrolls miss forecast

The pound rebounded from a four-week low against the dollar after U.K. services data beat economist forecasts and extended its gains as a report showing the U.S. added fewer jobs than expected last month weighed on the greenback.

Sterling reversed earlier losses spawned on the back of a dovish outlook for the U.K.’s interest rate trajectory following Thursday’s Bank of England rate increase, its first in a decade. The purchasing managers index figures for services -- the main component of the economy -- grew the most in six months in October. U.S. payrolls climbed 261,000, the Labor Department said Friday, compared with the 313,000 forecast in a Bloomberg survey.

Still, the U.K. currency has only partially pared its losses since the BOE’s decision that saw the pound post its steepest daily decline since the election result in June. The central bank damped the possibility of further hikes, despite raising the key interest rate to 0.5 percent, from a record low of 0.25 percent.

It is “a bit of a relief rally for the pound after yesterday’s heavy sell-off,” said Lee Hardman, a foreign-exchange strategist at MUFG in London. The “PMI data questions whether the market was correct in sharply scaling back BOE rate-hike expectations.”

The pound rose 0.3 percent to $1.3097 as of 1:05 p.m. in London, after falling to $1.3040, the lowest since Oct. 6. Sterling slid 1.4 percent on Thursday, its biggest drop since June 9. U.K. 10-year government bond yields were little changed at 1.26 percent.

The BOE’s Deputy Governor Ben Broadbent said on Friday that the U.K. may still need higher rates to get inflation back to the central bank’s two percent goal, anticipating it will need possibly a couple more rate rises. Markets are now pricing in another 25-basis-point move in November 2018, from August before Thursday’s decision.

“We think it is right to err on the side of caution; that rates won’t have to rise as the market, BOE seem to suggest,” said Steve Barrow, head of foreign-exchange strategy at Standard Bank in London. “If that’s correct, it also suggests that the pound’s slide yesterday might just be a foretaste of what is to come.”

Sentiment on the U.K. may have been weighed down earlier on Friday by London losing two potential initial public offerings, from Bakkavor Group Plc and Arqiva Group Ltd., over concerns about market uncertainty. The outlook for the currency in coming months may be driven by the outcome of Brexit talks, according to fund managers.

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