Pound weakness may be temporary

The pound rose from near a four-month low versus the dollar after Bank of England Governor Mark Carney said an expectation of a recovery in wages may prompt policy makers to increase interest rates.

Sterling strengthened for the first time in four days against the euro (CME:E6U14) after Carney said in a Sunday Times interview policy makers “don’t have to wait for the fact” to increase its benchmark rate from a record-low 0.5%, where it has been since March 2009. Investors may gain a clearer picture from the minutes of the Monetary Policy Committee’s last meeting, due to be published on Aug. 20. U.K. government bonds fell, pushing 10-year yields up from close to a 12-month low.

“Carney’s comments that the BOE would consider raising rates before real wages are growing sustainably and that there are a wide range of views on the MPC have been interpreted less dovishly,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Recent pound weakness may prove only temporary, especially versus the euro.”

The pound (CME:B6U14) gained 0.2% to $1.6730 at 2:06 p.m. London time after falling to $1.6658 on Aug. 14, the lowest since April 8. The U.K. currency appreciated 0.4% to 80 pence per euro after touching 80.36 pence on Aug. 14, the weakest level since June 12.

Carney’s focus on wages was promoted in the BOE’s quarterly Inflation Report on Aug. 13, when the central bank said annual earnings growth at the end of this year would be half what it previously predicted. Data that day showed wages fell for the first time since 2009 in the second quarter.
 

Best Performer
 

Sterling has appreciated 8.1% in the past year, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 0.6% and the dollar rose 0.2%.

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors have pushed back bets on a 25 basis-point increase in borrowing costs to May from as early as February before the central bank released new economic forecasts last week.

Eleven of 18 analysts in a Bloomberg News survey predict the committee voted 9-0 to keep the benchmark rate unchanged this month. The remainder forecast at least one dissenting vote. The BOE will publish the meeting minutes Wednesday at 9:30 a.m. London time.
 

Policy Dissent
 

“The tightening of the labor market, even if we haven’t seen that in wages yet, I think will start to encourage dissent,” Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London, said in an interview on Bloomberg Television’s “On The Move” with Anna Edwards. “Signs of that dissent being reflected in the minutes will be enough to probably still encourage sterling a little bit.”

The yield on 10-year gilts rose the most since February as easing geopolitical tensions from Ukraine to Iraq damped demand for the safest fixed-income assets. Officials from Ukraine, Russia and other countries met to discuss a truce in separatist- held territory in eastern Ukraine. Kurdish forces took control of most of Iraq’s largest dam, reversing some of the gains made by Islamic State militants, and Israel and Hamas are observing a cease-fire.

The 10-year gilt yield climbed seven basis points, or 0.07 percentage point, to 2.40% after falling to 2.32% on Aug. 15, the lowest since August 2013. The 2.25% bond due in September 2023 fell 0.585, or 5.85 pounds per 1,000-pound face amount, to 98.795.

Gilts returned 7.3% this year through Aug. 15, according to Bloomberg World Bond Indexes. Treasuries earned 4.4% and German securities gained 6.9%.

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Comments
comments powered by Disqus
Check out Futures Magazine - Polls on LockerDome on LockerDome