The pound strengthened a third day versus the euro as investors prepared to mine the Bank of England’s quarterly Inflation Report for guidance on when the bank will start to increase interest rates.
U.K. government bonds fell before central bank Governor Mark Carney presents the report, which will also include the institution’s updated economic projections. While Carney said in a June speech at Mansion House that the BOE may raise its key interest rate from a record earlier than investors expected, he since softened that stance. Last month he said that any increases in interest rates will be determined by the data.
“The market will be using the Inflation Report to second-guess the timing and extent of U.K. rate hikes,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London. “Since his Mansion House speech, Carney may be quite conscious of the power of his hawkishness. We are seeing this come through now as he makes references to not wanting to rock the boat of U.K. recovery.”
McDarby said although he is calling for the pound to “remain lower, testing through $ 1.6750 to $ 1.6720, a hawkish Carney would no doubt result in us having to re-evaluate that short-term view.”
The pound strengthened 9.8 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes, as investors brought forward their expectations for the BOE’s first interest-rate increase since 2007. Even so, it’s fallen 0.3 percent in the past month amid signs the U.K. economy is falling short of analysts’ expectations.
The pound gained 0.2 percent to 79.39 pence per euro as of 8:17 a.m. London time after appreciating 0.5 percent in the previous two days. Sterling was little changed at $ 1.6821 after dropping to $ 1.6757 yesterday, the least since June 11.
Citigroup Inc.’s Economic Surprise Index for the U.K., which shows whether data beat or fell short of economists’ forecasts, was at minus 7.1 yesterday, below zero for a ninth day and down from this year’s high of 37.1 set in February.
U.K.’s unemployment rate declined to 6.4 percent in the three months through July, from 6.5 percent previously, the Office for National Statistics will say today, according to the median estimate of economists in a Bloomberg News survey. Average weekly earnings dropped 0.1 percent in the three months through June, the first decline since May 2009, according to a separate Bloomberg survey.
Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are speculating that U.K. borrowing costs won’t increase by a full 25 basis points until February. In his May Inflation Report, Carney said slack remained in the economy, an assertion that pushed back expectations for the first rate increase to April, from as soon as February the day before the report.
The pound has declined against the dollar for the past five weeks, the longest run since 2012. That increases the chance of a rally in the pound on any hints of an earlier-than-expected rate increase, Simon Smith, chief economist at FXPro Group Ltd., wrote in a note yesterday.
“Over the past two years, the daily cable range on Inflation Report days has been nearly twice the normal daily average,” he wrote, referring to the pound-dollar currency pair. “With the market clearly short sterling, the risk is skewed towards short-covering on anything other than a decidedly dovish outcome.”
Bank of England policy makers maintained their key interest rate at a record-low 0.5 percent last week. Minutes of the Aug. 6-7 meeting, which will show whether the decision was unanimous, will be released on Aug. 20.
The U.K.’s 10-year gilt yield rose three basis points, or 0.03 percentage point, to 2.51 percent after falling to 2.40 percent on Aug. 8, the lowest since August 2013. The 2.25 percent bond due in September 2023, fell 0.205, or 2.05 pounds per 1,000-pound face amount, to 97.915.
Gilts returned 5.7 percent this year through yesterday, Bloomberg World Bond Indexes show. That compares with a gain of 6.2 percent for German securities and 3.7 percent for Treasuries.
To contact the reporters on this story: Alexa Liautaud in London at [email protected]; David Goodman in London at [email protected]
To contact the editors responsible for this story: Paul Dobson at [email protected] Keith Jenkins, Todd White