Sterling rose to near a two-year high against the euro on Wednesday with investors focusing on the British economy and the contrasting monetary policy outlooks between the euro zone and Britain. Bank of England Governor Mark Carney is to give a speech in Wales on Thursday and could reiterate that interest rates will be raised in the spring of 2015. With Scotland's referendum out of the way, having rejected independence from Britain, traders said one more obstacle to a rate hike has now been removed.
That will be in contrast to the euro zone, where European Central Bank President Mario Draghi pledged to keep monetary policy accommodative - for as long as it takes to push ultra-low inflation in the euro zone back up closer to 2 percent. The euro fell to 78.12 pence, not far from a two-year low of 78.10 struck after Scotland voted to stay in Britain late last week. It was last trading at 78.22 pence, still down 0.25 percent on the day. The European single currency was also hurt by data which showed German business sentiment dropping for a fifth straight month in September.
Despite its gains against the euro, sterling struggled to make headway against the dollar and was last down 0.3 percent at $1.6343. Traders said many investors were cautious about making huge bets, given the uncertainty over constitutional changes that the Scottish vote triggered. As Britain's national elections approach next May, a debate regarding providing more powers to Scotland in combination with a reform under which English MPs would vote only on English issues is set to take centre stage.
In other words, if the opposition Labour Party forms a national government in 2015 with the support of non-English MPs, it could face major problems passing legislation applicable only to England if it had no majority among lawmakers from England. Until there is more clarity, sterling will struggle to make much headway especially against the dollar, analysts said.
"Once it is clear what kind of independent political power Scotland will be given and investors have finally received a clear time frame from the BoE for a rate rise, I see the potential for this pair to return to 1.70 by the end of the year," said Jameel Ahmad, chief market analyst at FXTM.
Until a turnaround in mid-July, sterling had been one of the best performers among major currencies in the past year, propelled by expectations robust economic growth would prompt the Bank of England to raise interest rates by early next year. Investors, including some of the world's largest money managers, are expecting the BoE to tighten monetary policy early next year. "We agree with February in terms of the date (of a BoE rate hike)," said Ian Winship, head of sterling bond portfolio at Blackrock.
"It's a fair enough distance from the general election to be a political issue and you'll also have had the February inflation report. In terms of market pricing, there's about a 65 percent probability of a 25 basis point rise price in. The focus after that will be the trajectory of policy normalisation." Meanwhile, British government bond prices rose for a fourth straight day, following German Bunds higher. Long-dated bonds outperformed, with the 30-year gilt yield troughing at 3.061 percent - its lowest level since September 4. At 1400 GMT it was at 3.064 percent, down 2 basis points on the day.
Comments
Comments are closed.