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Pound on Track for 4th Week of Gains, BOE Statement Supports

Sterling edged higher against the dollar and the euro on Friday after the Bank of England avoided sub-zero rates for now, putting the pound on track for its fourth week of gains versus the dollar.

Focusing on the prospects for a post-lockdown rebound, the BOE gave British lenders at least six months of breathing space before negative interest rates are a possibility.

BOE’s Deputy Governor Ben Broadbent said on Friday it was reasonable for the BoE to give banks at least six months to prepare for the possible introduction of negative interest rates.

“The BOE’s strong hints that negative rates would not be used at this stage in the economic cycle triggered a substantial re-pricing in the UK money market curve and GBP,” said Petr Krpata, chief EMEA FX at ING in a note to clients.

Sterling was 0.2% higher at $1.3695 versus the dollar at 1026 GMT, gaining more than a cent against the greenback since the BOE’s meeting on Thursday.

It also hit its highest against the euro since May 2020 at 87.38 in earlier trade, before flattening at 87.45 against the single currency.

Adrian Schmidt, head of FX strategy at Continuum Economics, said the pound strength this week was a response to an “excessive” rise in UK yields, with ten-year gilt yields rising to their highest levels since March 2020.

“GBP was in any case already generously priced relative to the previous yield levels. While we can see a case for gains against the euro, the rise against most other currencies looks excessive.”

Money markets pushed forward expectations of a rate cut by six months to February 2022, before paring them back to December 2021. Before the BOE statements, bets were for rates to be cut to sub-zero in August 2021.

Figures from mortgage lender Halifax showed on Friday that British house prices fell last month for the first time since May, taking the annual rate of increase to its weakest since August.

Editing by Raissa Kasolowsky and Nick Macfie

Source: Reuters

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