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Pound extends advance after rate view turns hawkish

Mar 20 2017 13:06
Bloomberg: Stefania Spezzati

London - The pound strengthened, adding to this year’s biggest weekly gain, amid broad dollar weakness and after investors increased bets that the Bank of England (BOE) will tighten policy as early as next year.

Sterling climbed for a fourth day in the longest winning streak since December 5 and touched $1.2436, the strongest level since February 28.

Interbank investors bought the British currency at the start of London trading, according to a trader in Europe who spoke in condition of anonymity as the person is not authorized to speak publicly.

On charts, $1.2436 is the pound’s first technical resistance, which also represents the Ichimoku cloud top.

If sterling breaks above that level, the next hurdle is at $1.2461, the 76.4% Fibonacci retracement of the currency’s decline from February 24 through March 14.

Market pricing now implies around a 90% chance of the BOE raising rates by 25 basis points by September 2018.

The odds were just 60% on Wednesday, a day before policy maker Kristin Forbes voted for a rate increase even as the central bank left borrowing costs unchanged in line with the bias of the other eight rate setters.

Investors will look at UK data due this week, including inflation figures, to re-assess policy prospects.

"A week of soft UK data could give any lingering hawkish BOE hopes a harsh reality check," strategists at ING Groep wrote in a note to clients.

The bank is maintaining its strategy of selling sterling on any rally.

UK Prime Minister Theresa May will visit the Welsh city of Swansea on Monday as part of a tour that will also include Scotland and Northern Ireland to address their worries about Brexit.

May is expected to trigger Article 50 of the Lisbon Treaty by the end of this month. Morgan Stanley doesn’t expect such a decision to come as a shock for markets, and favours buying the British currency with a target of $1.2900.

Ten-year gilts edged lower, with yields rising two basis points to 1.26%.

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markets  |  currencies  |  pound

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