Sterling reached its highest against the euro in more than two years on Thursday, as the latest comments from Bank of England Governor Mark Carney helped the pound get to less than 78 pence per euro for the first time since July of 2012. Along with a raft of other major currencies, the pound was weaker against the dollar. But the contrasting outlooks for monetary policy in the euro zone and United Kingdom have taken sterling close to highs against the euro not seen since the 2008 financial crisis.
Carney said that a rise in interest rates was "getting closer". He was also the latest central banker to warn that loose monetary conditions may have led investors to misprice risk and created the danger of a sharp reversal in markets - comments that would naturally point to tighter rates to cool sentiment.
Sterling pushed up to a high of 77.855 pence against the euro in response before retreating to 78.09 pence. "I don't think there is much mystery to Carney now: if he can hold off raising rates for the first six months of next year, he will, but that is not going to stop him from giving these sort of broad indications that rates will rise so that financial stability risks remain in check," said Stephen Gallo, a strategist with Canadian bank BMO in London.
Sterling also recovered some of the day's losses against a broadly stronger dollar to trade at $1.6311, down just over 0.1 percent on the day. After the pound's rough ride leading up to last week's vote on Scottish independence, market attention is swinging back to diverging policy in the UK and continental Europe, and analysts say the euro may continue to fall.
"Notwithstanding some mixed messages from US Federal Reserve policymakers, the economic fundamentals continue to point to dollar strength and a focus on the divergence in policy outlooks that will weaken the euro," said Phyllis Papadavid, senior global FX strategist at BNP Paribas in London. Until mid-July, the pound had been one of the best performers among leading currencies, surging 15 percent against the dollar in a year, on expectations the Bank of England would raise interest rates earlier than its peers.
Those expectations have been pushed back, but some major investment houses still predict the bank will raise rates in November. On the gilt market, the premium that 10-year British government bonds offer over the equivalent German Bund neared its highest level this week after Carney's remarks.
The gap between the two bond yields rose more than a basis point and eventually topped 149 bps, just shy of Monday's high of 149.2 bps, before receding back to around 148 bps. In the cash market, gilt prices rose modestly, boosted by a weaker-than-expected US business survey that pushed US Treasury and Bund prices higher.
Comments
Comments are closed.