Pound reaches strongest level against euro

The pound (CME:B6M14) reached the strongest level in 20 months versus the euro (CME:E6M14) as speculation the Bank of England is moving closer to raising interest rates boosted the allure of U.K. assets.

Sterling traded above $1.70 for the first time since 2009 after Bank of England Deputy Governor Charlie Bean said higher rates would be a sign that the economy was returning to normal. The currency posted its biggest weekly gain in four months after BOE Governor Mark Carney said on June 12 that borrowing costs may rise sooner than economists expect. Two-year government bonds fell, reducing the yield difference with 10-year gilts to the least in almost a year.

“We continue to be constructive on sterling, especially against the euro, where the monetary policy cycles are continuing to diverge,” said Josh O’Byrne, a foreign-exchange strategist at Citigroup Inc. in London. “Carney was more hawkish than expected and you saw an upward revision in rates markets. This morning we’ve seen rates tick up further still and the pound generally supported.”

Policy makers are due to release the minutes of their June 4-5 meeting on June 18 as money-market rates indicate the Bank of England will raise rates as soon as February. In August 2009, when Britain’s currency fell below $1.70, the central bank was expanding its balance sheet by buying government bonds in an attempt to revive the economy from the worst recession since World War II.
 

Citigroup Forecast
 

Sterling was little changed at 79.89 pence per euro at 4:11 p.m. London time after advancing 1.9% over the past eight days. It earlier appreciated to 79.59 pence, the strongest since Oct. 1, 2012. The pound was at $1.6985 after rising to $1.7011, the highest since Aug. 6, 2009. It climbed 1% last week, the most since the period ended Feb. 14.

Citigroup forecasts the pound will advance 0.8% to $1.71 by year-end, stronger than the $1.65 median of analyst estimates compiled by Bloomberg. The bank is the biggest foreign-exchange trader, based on a Euromoney Institutional Investor Plc survey published last month.

The pound strengthened 9.2% in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as a strengthening U.K. economy boosted speculation the Bank of England will move closer to raising interest rates. The euro gained 1.9% and the dollar advanced 0.1%.
 

‘Symbolic Step’
 

An increase in interest rates “will be a symbolic step, because it will be an indication that we are on the road back to normality,” Bean, who oversees monetary policy at the central bank and will retire on June 30, told the Sunday Times in an interview. “I would welcome us getting on to the path of normalization, as a demonstration that the economy is healing,” he added.

Credit Suisse Group AG and Commerzbank AG brought forward their predictions of when the Bank of England will first raise its key rate to November. Credit Suisse analysts had previously forecast an increase in February 2015, while Commerzbank predicted policy makers would act in the summer of 2015.

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting the benchmark rate will increase 25 basis points, or 0.25 percentage point, by February, versus May before Carney’s speech last week.

The Bank of England’s main interest rate has been at a record-low 0.5% since March 2009.

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