Bank of England to raise interest rates?

The pound (CME:B6M14) appreciated for a seventh day versus the euro (CME:E6M14), extending the longest run of gains since September, as signs U.K. growth is accelerating pushed the currency to its strongest level in 19 months.

Sterling rose against 13 of its 16 major peers amid speculation the performance of Britain’s economy will prompt the Bank of England to bring forward plans to raise interest rates. Foreign-exchange options showed traders cut bets the pound would be weaker in a year’s time against the dollar (NYBOT:DXM14) to a five-year low. U.K. government bonds declined as the Debt Management Office auctioned £1.4 billion ($2.4 billion) of inflation-linked gilts due in 2019.

“I feel that against the euro we will see €1.25 sooner rather than later in light of renewed focus on U.K. interest-rate hikes,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International in London. An exchange rate of €1.25 per pound is the equivalent of 80 pence per euro. “It will take an even bigger improvement in the outlook of the U.K. to allow the pound to break much outside the $1.66 to $1.70 range,” he said.

The pound appreciated 0.2% to 80.45 pence per euro at 2:50 p.m. London time and reached 80.33 pence, the strongest level since November 2012. The U.K. currency gained 0.9% in the previous six days. Sterling rose 0.3% to $1.6834.

Britain’s currency is rising after reports this week showed U.K. unemployment declined more than expected and industrial production rose at the fastest annual pace since 2011. More than half the 29 financial institutions surveyed by Bloomberg now see an increase in central bank rates by March.
 

Rate Forecast
 

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting the benchmark rate will rise 25 basis points by next April.

Sterling has strengthened 8% in the past 12 months, the best performer after New Zealand’s dollar among 10 developed-nation currencies tracked by Bloomberg Correlation- Weighted Indexes. The euro gained 1.5%, while the dollar slipped 0.2%.

The premium traders pay for one-year options to sell sterling against the greenback versus those allowing for purchases was 0.345 percentage point today, 25-delta risk reversals show. That matches yesterday’s level which was the least since June 2009, based on closing prices, showing diminishing bets that sterling will fall.
 

Gilts Sale
 

The U.K.’s 10-year yield increased one basis point, or 0.01 percentage point, to 2.72% after climbing to 2.76% yesterday, the highest since April 4. The 2.25% gilt due September 2023 fell 0.065, or 65 pence per 1,000-pound face amount, to 96.185.

The extra yield investors get for holding 10-year gilts instead of German bonds was at 133 basis points today, the widest since before the euro’s introduction in 1999, based on closing-price data compiled by Bloomberg. The U.K. rate was eight basis points higher than equivalent-maturity Treasuries.

The U.K. sold the five-year inflation-linked gilts at an average real yield of minus 0.918%. Investors bid for 2.78 times the securities offered, up from a bid-to-cover ratio of 2.47 at a previous auction in March.

Bank of England Governor Mark Carney and Chancellor of the Exchequer George Osborne are scheduled to address the annual Mansion House Dinner in London today.

Gilts returned 3.1% this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries earned 2.7% and German securities gained 3.9%.

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