Sterling surges on rate alert

Sterling jumped as much as 1.2% against the euro after the Bank of England said interest rates probably needed to rise sooner and by a bit more than it had previously thought because of the strength of the global economy.

Market interest rate futures now project a 60% chance of a Bank of England rate hike in June and fully-price in an increase in August meeting. The central bank’s Monetary Policy Committee raised interest rates for the first time in a decade in November.

The Bank of England voted unanimously to keep UK rates on hold at 0.5% but governor Mark Carney and colleagues saw a growing need to move faster on raising rates to keep a grip on inflation.

“This is a Brexit-contingent hawkish signal,” said Viraj Patel, an analyst at ING in London.

“The comment in itself was the surprise. That was a clear message from the bank that the [interest rate] curve was a little too flat for their liking,” he said.

The pound rose to a day’s high of $1.4067 against the euro, the pound rallied more than 1.2%, its best one-day performance in nearly five months, to a one-week high of 87.3p before falling back.

Britain’s internationally exposed Ftse 100 dropped to a session low and two-year government bond yields rose to their highest since late 2015.

Sterling has been one of the best-performing currencies this year, rising to its highest levels since before the June 2016 vote to leave the EU. Investors have focused on the surprising resilience of the UK economy and progress in Brexit negotiations, but the rally faltered in recent sessions.

Markets are now predicting central banks globally will tighten policy faster than previously expected with inflation expectations growing.

But the outlook for Britain has been overshadowed by the talks for Britain’s exit from the EU next year, and uncertainty over their future relationship. Sterling remains far below the plus-$1.50 levels before the Brexit vote.

KEYWORDS: Sterling, Rates, Euro

 

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