Sterling under pressure over interest rates

The pound depreciated the most in more than four years against the dollar in the past week, amid speculation the Bank of England was moving toward higher interest rates more slowly than the Federal Reserve.

Sterling dropped for the first time in six weeks as the UK central bank kept borrowing costs at a record low, marking six years with a 0.5% rate.

The biggest losses came on Friday, as a US jobs report exceeded economists’ forecasts and strengthened bets the Fed will tighten monetary policy.

UK two-year government bonds posted the longest run of weekly declines in eight months as investors still see the BOE becoming the second major central bank to raise rates.

“Everyone is falling all over each other to price a June Fed rate hike,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark.

“I don’t see why the pound should be particularly stronger than it has been.”

Investors are currently fully pricing a 25 basis-point increase in UK borrowing costs by February 2016, compared with April as recently as Monday, according to MPC-dated forward Sonia fixings data provided by ICAP Plc.

That assumes the current four basis-point spread for Sonia fixings below the bank rate would return to zero once the BOE raises rates.

The odds the Fed will raise borrowing costs by June rose to 23%, from 18% on Thursday, futures contracts showed after the US jobs data. The odds were at about 82% for a rise by December.

Bloomberg