Sterling hits 5-year highComment on this story
London - Sterling hit its highest in over five years against a basket of currencies on Monday, as investors positioned for merger and acquisition inflows and growing expectations of interest rate hikes by the Bank of England (BoE).
The pound jumped 2 percent against the dollar last week, its best weekly performance since June, as investors brought forward expectations of when the BoE will tighten monetary policy - something highlighted by the short sterling futures.
According to RBC Capital Markets, based on the short sterling strip and the sterling overnight interbank money market rates (SONIA), the first implied rate hike is being priced in by February next year, compared with 15 months' time in the middle of last week.
Sterling strength came despite weekend assurances from BoE Governor Mark Carney that a number of measures from jobs to wages have to show the economy is firing all cylinders before interest rates can be raised.
“The market has not been quite as relaxed, expectations of rate hikes having been enhanced, which has, in turn, supported the currency,” said Simon Smith, chief economist at FXPro.
“Sterling/dollar is now at levels last seen more than four years ago.”
Sterling was firm at $1.6755, having hit a high of $1.6823 in Asian trade, its highest level since late 2009.
Speculators are targeting $1.70, a level last seen in August 2009. But some investors were turning cautious as, based on the 14-day relative strength index, a technical indicator, the pound was nearing oversold territory.
For now, though, sterling was also helped by talk of merger and acquisition inflows, with some investors positioning for Vodafone UK shareholders to get their payout after the company sold out of Verizon's US wireless business.
The euro was flat on the day at 81.80 pence, having dropped to a one-year low of 81.57 pence in Asian trade.
Sterling's broad based gains saw the BoE's trade-weighted index rise to 86.6, its highest since late 2008, according to Reuters data.
Sterling's gains accelerated last week after the BoE raised its forecast for UK growth this year to 3.4 percent from 2.8 percent.
The Bank also said market pricing calling for the first tightening of policy in five years in the second quarter of next year was consistent with keeping inflation on target.
If the BoE lifts rates next year, it is likely to be the first major central bank to do so.
Both the Fed and the Bank of Japan are still buying bonds, injecting liquidity and keeping rates near zero.
“With other major central banks not yet even seriously considering rate hikes, even the prospect of very gradual and modest BoE rate hikes ahead is likely to continue boosting the relative attractiveness of the pound further,” said Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ. - Reuters