LONDON: Sterling hit a two-month high against a basket of currencies yesterday as improving UK data prompted markets to bring forward expectations when British interest rates will rise.
But traders said the pound could struggle to see further gains as sellers emerge at higher levels.
Trade-weighted sterling was last at 81.5, having hit an intra-day high of 81.6, which matched the peak hit on June 17. Against the dollar it slightly lower at $1.5620, having hit an intra-day peak of $1.5657, its highest since June 19. Some traders said they would start shorting sterling around the 1.5660/90 level, which would act as near-term resistance.
The euro was flat at at 85.33 pence, but still trading close to a 1-1/2 month low. Bank of England governor Mark Carney indicated the bank would keep interest rates at 0.5 percent until the jobless rate falls to 7 percent, which it anticipates for the end of 2016.
But with recent UK data pointing to a stronger recovery, there are doubts on whether the bank can keep rates at record lows for that long, reflected in Friday’s rise in 10-year gilt yields to close to a two-year peak. “Markets were looking for concrete assurances from the BoE when it came to forward guidance and we didn’t really get that,” said Craig Erlam, market analyst at Alpari.
“There were too many caveats and there was nothing conclusive that says interest rates will stay low for three years,” he said, adding that sterling could test the $1.5750 level though there might be some pullbacks along the way.
Sterling overnight interbank average rates (SONIA) — the very short-term interest rates that form the basis of lending costs to the wider economy — have inched towards, pricing in a first rate rise in 18 months compared with two years on Wednesday.
The two-year SONIA was at 0.55625 percent while the 18-month rate was at 0.4875, pointing to bets on a BoE rate hike in 2015.
An unexpected division among BoE policymakers about the guidance plan this week, coupled with recent positive economic reports ranging from rising house prices and retail sales has supported the notion of an earlier tightening in policy.
Reuters
