The pound headed for a second weekly gain versus the dollar after reports added to signs the U.K. economic recovery is gathering pace, fueling bets the Bank of England will raise interest rates earlier than it forecast.
Sterling climbed to its highest level in eight weeks against the dollar yesterday. The pound advanced as investors boosted wagers that the central bank will increase its benchmark interest rate before 2016, when it anticipates the unemployment rate will have fallen enough to justify higher borrowing costs. Government bonds rose, snapping a four-day decline that pushed 10-year yields to a two-year high yesterday.
“It’s another good week for the pound,” said Christian Lawrence, a foreign-exchange strategist at Rabobank International in London. “If data continues to improve, then that could possibly raise market expectations that the BOE will begin raising rates at a slightly earlier juncture.”
The pound was little changed at $1.5632 at 9:58 a.m. London time after appreciating to $1.5652 yesterday, the highest since June 19. It has gained 0.9 percent this week. The U.K. currency was at 85.30 pence per euro after reaching 85.05 pence yesterday, the strongest since July 3.
Retail sales including fuel increased 1.1 percent last month from June, the statistics office said yesterday. A government report a day earlier showed jobless claims fell in July more than economists predicted, with the unemployment rate unchanged at 7.8 percent.
Bank of England Governor Mark Carney has pledged to refrain from raising rates until the jobless rate falls to 7 percent, which policy makers don’t expect until at least the fourth quarter of 2016. Seventeen of 25 forecasters in a Bloomberg News survey see unemployment falling to that level by mid-2016, with 13 predicting it will happen in 2015 at the latest.
The implied yield on short-sterling futures contracts expiring in September 2016 increased to 2.23 percent yesterday, the highest since June 25, signaling traders are adding to bets interest rates will rise.
The U.K. currency has jumped 4.1 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 3.1 percent and the dollar strengthened 3.2 percent.
Sterling’s advance provides an opportunity to sell the currency, Morgan Stanley strategists led by London-based Hans Redeker said. They predict the pound will weaken to $1.48 in three months on bets the Bank of England will reaffirm its intention to keep rates low.
“The market is obsessed with the economic momentum, but there is a substantial output gap in the U.K., which will require several years of good economic performance to close,” Redeker, the head of global foreign-exchange strategy, said in a phone interview yesterday. “The Bank of England will make it clear pretty soon that it is focusing on the output gap.”
Benchmark 10-year government bond yields fell one basis point, or 0.01 percent to 2.68 percent, after climbing to 2.71 percent yesterday, the most since August 2011. The 1.75 percent bond maturing in September 2022 rose 0.06, or 60 pence per 1,000-pound face amount, to 92.58.
The Debt Management Office is scheduled to sell 2 billion pounds of bills.
Gilts lost 4.6 percent this year through yesterday, Bloomberg World Bond Indexes show. German securities dropped 2.4 percent and Treasuries declined 3.4 percent.
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