London - The pound climbed to a three-week high against the dollar after a report showed UK services unexpectedly expanded in January, calling into question whether the market’s outlook for the future path of interest rates was too pessimistic.
Sterling also strengthened versus the euro before the Bank of England announces its policy decision on Thursday. With all 41 economists in a Bloomberg survey predicting the BOE will hold its official rate at a record-low 0.5 percent, focus will turn to the economic projections in the central bank’s quarterly Inflation Report, especially since the market has pushed back its pricing of the first UK rate increase in almost 9 years to beyond March 2017 as the outlook for the global economy deteriorates.
“The BOE’s overall tone is likely to be dovish, signaling they are in no immediate rush to begin raising rates,” said Lee Hardman, currency strategist at Bank of Tokyo-Mitsubishi in London. “That said, there might be some pushback against the current market pricing, which is too pessimistic. This could provide a temporary support for the pound.”
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The pound rose 0.5 percent to $1.4485 at 11:26 a.m. London time and touched $1.4496, the highest since Jan. 12. Sterling strengthened 0.5 percent to 75.42 pence per euro.
Markit Economics’s services Purchasing Managers Index rose to 55.6 last month from 55.5 in December, defying economists’ predictions for a decline to 55.4. Markit said the services gauge, along with its manufacturing and construction surveys, are consistent with quarterly economic growth of about 0.6 percent. That’s up from 0.5 percent in the fourth quarter.
BLOOMBERG