RTRS:Sterling trades at near three-year high against the dollar
(Reuters) - Sterling traded up near its highest in nearly three years against the dollar on Friday as investors added to long bets on expectations that the Bank of England could be the first major central bank to hike interest rates.
The gap between the two-year British government bond yield and U.S. Treasuries widened, giving sterling a boost against the dollar for a fourth straight day. For the week sterling has jumped nearly 2 percent against the dollar, putting it on track for its best weekly performance since June 2013.
Sterling rose to $1.6718, advancing past reported option barriers at $1.6700 to hit its highest level since early May 2011. Speculators are targeting $1.6747, the late April peak with a move above that set to take the pound to its highest since late 2009.
The euro shed 0.17 percent to trade at 81.98 pence, not far from a recent one-year low of 81.68 pence struck in late January.
"A combination of not so great U.S. data and an upbeat economic outlook is driving sterling higher against the dollar," said Sasha Nugent, currency strategist at Caxton FX.
"The markets are not taking the BoE's latest forward guidance too seriously since they know if the economy keeps growing like it is doing now, the BoE will have to raise rates."
The dollar has struggled in the past week, hurt by weak U.S. jobs data, a dovish outlook from Janet Yellen, who chairs the Federal Reserve, and softer-than-expected retail sales data for January and which does not bode well for first quarter growth.
In contrast, in its quarterly inflation report on Wednesday, the BoE raised its forecast for UK growth this year to 3.4 percent from 2.8 percent and said market pricing calling for the first tightening of policy in five years in the second quarter of next year were consistent with keeping inflation on target.
The Bank, which had previously set a 7 percent unemployment threshold after which it would consider rate hikes, said it would look at 18 separate measures of the spare capacity in Britain's economy before tightening policy.
That should mean that the Bank will keep rates low for long, but some investors have chosen to ignore it and moved to price in a Bank rate hike much earlier than the second quarter of next year.
Sterling overnight interbank money market rates are pricing in a slim chance of a hike in interest rates in a year's time, compared with 15 months' time before Wednesday's inflation report.
If the Bank hikes rates next year, it would make it the first major-economy central bank to do so. Both the Fed and the Bank of Japan are still buying bonds, injecting liquidity and keeping rates near zero.
