World Economy

Pound Gains May Endure

Pound Gains May Endure
Pound Gains May Endure

The pound’s rally may continue next week, having strengthened against both the euro and dollar amid speculation monetary policy in both the US and euro area are likely to be looser for longer than markets previously expected.

Sterling gained versus most of its major peers this week amid mixed UK data that showed the jobless rate fell, while the inflation rate turned negative and wage growth accelerated less than economists forecast. Data due Oct. 22 will show retail sales increased in September, according to a Bloomberg survey of analysts. This comes the same day as the European Central Bank meets amid speculation that the institution will eventually increase stimulus. Meanwhile, markets are only pricing a 32% probability the Federal Reserve will raise rates this year, down from 64% a month ago.

“The pound has emerged as what we call the poor man’s decoupling trade,” saidValentin Marinov, head of Group-of-10 currency research at Credit Agricole SA’s corporate and investment-banking unit in London. “Investors turn to the pound when the other policy divergence trade -- long US dollar -- stops working.” A long position is a bet that the price of a currency or asset will rise.

Sterling rose for a third week versus the dollar, gaining 0.8% to $1.5444 as of 5 p.m. London time Friday. The pound strengthened 0.7% to 73.62 pence per euro, its first weekly advance since mid-September. On a trade-weighted basis, the UK currency climbed from a five-month low reached on Oct. 13.

While the ECB may not exceed market expectations, they will keep investors betting that more stimulus is to come, Credit Agricole’s Marinov said. If the UK retail sales data are good, euro-sterling is an attractive cross to sell at current levels, he said.

UK retail sales, including auto fuel, rose 0.3% in September, after a 0.2% increase in the previous month, the Office for National Statistics will say on Oct. 22, according to the median forecast of economists in a Bloomberg survey.

 Rate Outlook

BOE official Kristin Forbes reiterated her view Friday that the next move in UK interest rates will be up and that it should happen “sooner rather than later.”

Forward contracts based on the sterling overnight index average, or Sonia, suggested that a full 25 basis-point increase in the BOE’s key rate won’t come until after December 2016. The central bank’s official rate has been at a record-low 0.5% since March 2009 and the last increase came in 2007.

UK government bonds advanced this week with the 10-year gilt yield dropping six basis points, or 0.06 percentage point, to 1.80%. The 2% security due in September 2025 rose 0.55, or 5.50 pounds per 1,000-pound face amount, to 101.79.