BS: Pound Resumes World-Beating Rally on Inflation
The pound resumed its world-beating rally as a jump in U.K. consumer prices provoked the largest market reaction since Bank of England Governor Mark Carney said interest rates may rise sooner than investors expected.
The British currency strengthened at least 0.4 percent versus all of its 16 major peers and U.K. government bonds fell, pushing up two-year yields by the most since Carney’s speech at the Mansion House in London last month. Interest-rate decisions will continue to be “data driven,” the BOE governor told lawmakers today.
“We are still seeing inflation surprise to the upside,” said Adam Cole, the head of Group-of-10 currency strategy at Royal Bank of Canada in London. “It should work towards lifting U.K. rate expectations, which is clearly why sterling is taking it positively. We would see value in expressing that view in the currency at these kind of levels.”
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The pound rose 0.5 percent to $1.7161 at 1:06 p.m. London time, the biggest increase since June 12, the day of Carney’s speech. Sterling strengthened 0.5 percent to 79.34 pence per euro, snapping a two-day decline.
Cole forecasts the U.K. currency will advance to 77 pence against the euro before the end of September. The median prediction of analysts compiled by Bloomberg is for sterling to strengthen to 79 pence.
Sterling Rally
The pound surged more than 11 percent in the past year, making it the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, on speculation the strength of the recovery would compel the Bank of England to be the first major central bank to end extraordinary stimulus measures. The euro rose 1.1 percent and the dollar slipped 3.4 percent.
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Sterling advanced for the first time in four days against the dollar today as the Office for National Statistics said annualized U.K. inflation was at 1.9 percent in June from 1.5 percent the prior month. That compares with 1.6 percent forecast by analysts in a Bloomberg survey.
“That keeps the notion of a rate hike before the end of the year firmly on the table,” Stephen Gallo, the European head of currency strategy at Bank of Montreal in London, said in an interview on Bloomberg Television’s “The Pulse” with Manus Cranny.
The five-year break-even rate, a bond-market gauge of market inflation expectations, widened for the first time in nine days, reaching 2.85 percentage points. It dropped as low as 2.793 percentage points before the inflation data was published today, the lowest rate since March 4.
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BOE Guidance
Today’s sterling gains erased last week’s drop, when the U.K. currency weakened against the dollar for the first time since May as reports from construction and manufacturing output to home prices all fell short of analyst forecasts.
Citigroup Inc.’s Economic Surprise Index for the U.K., which measures by how much reports are exceeding or falling short of economist estimates, was at minus 26.8 yesterday and dropped to minus 29.4 on July 10, the lowest level since May 2013.
The BOE’s Monetary Policy Committee “had no pre-set path,” Carney said in today’s testimony. “The only guidance the MPC is now giving is around the medium-term path of interest rates, not the timing of the first move and on asset prices.”
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Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting the U.K. borrowing costs will increase 25 basis points by February.
Ten-year gilt yields rose four basis points, or 0.04 percentage points, to 2.65 percent. The rate slid to 2.576 on July 10, the lowest since June 2. The 2.25 percent bond due September 2023 fell 0.34, or 3.40 pounds per 1,000-pound face amount, to 96.795.
Two-year yields, those most sensitive to changes in central bank rates, jumped five basis points to 0.88 percent, the biggest increase since June 13, the day after Carney’s evening speech, when he said the decision on when to raise interest rates was becoming “more balanced.”
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To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Mark McCord
