Sterling hits three-week high against the euro

Sterling advanced yesterday approaching its strongest level in three weeks against the euro, after Bank of England policymakers said China’s slowdown hasn’t shaken their conviction that the time for the first UK interest-rate increase since 2007 is coming nearer.

Sterling gained versus all except two of its 16 major peers as Bank of England officials said in minutes of their policy meeting that the UK economy’s prospects are positive.

The nine-member Monetary Policy Committee voted 8-1 this week to keep its benchmark interest rate at a record-low 0.5%, with Ian McCafferty again the lone dissenter. British government bonds halted a two-day decline, as a result.

“Markets have just been forced to recorrect an overly dovish interpretation going into the event,” said Jeremy Stretch, head of foreign- exchange strategy at Canadian Imperial Bank of Commerce in London.

"The message from the Bank of England is “yes, we are mindful of the issues, but we are not necessarily thinking that’s going to change the central scenario at this point,” he said.

The pound appreciated 0.2% to 72.81 pence per euro late yesterday afternoon.

It touched 72.40 pence on Wednesday, the strongest level since August 21. Sterling climbed 0.6%, to $1.5464, after dropping 0.2% a day earlier.

The pound fell 0.7% in the past month among a basket of 10 developed-market currencies, according to Bloomberg Correlation-Weighted Indexes.

That pared its advance this year to 7.3%, the indices show.

Risks to the UK economy were highlighted on Wednesday as a report showed industrial production unexpectedly declined in July.

Trade data the same day also disappointed, with the goods trade deficit widening more than economists forecast and the most in a year.

The Royal Institution of Chartered Surveyors said yesterday that UK house prices will rise twice as fast as it previously anticipated this year, citing a worsening supply picture.

The Monetary Policy Committee’s view echoed the one delivered by governor Mark Carney last month. He said the bank could look past events in China and the decision on the timing of the first rate increase would come into sharper focus at the start of 2016.

“The message which seems to be standing out from this minutes is that they haven’t increased their sensitivity to international developments,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London, yesterday.

“While the market may have been expecting a slightly more dovish message, it does seem that they are still in line with Carney’s previous comments, and that’s why we saw the initial market reaction,” he said.

McCafferty maintained his dissent for a second month, arguing that building pressure on domestic costs meant tighter policy was warranted now.

Forward contracts based on the sterling overnight index average suggested that a full 25 basis-point increase in the bank’s key rate won’t come until October 2016.

“To say we are immune to what’s going on in the rest of the world isn’t right,” Steven Major, global head of fixed-income research at HSBC Holdings Plc in London, said on Bloomberg Television before the bank’s decision.

“I’m pretty confident there’s no change in UK rates for a very long time.”


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