Sterling hits seven-year high

Sterling reached a seven-year high against a trade-weighted basket of currencies on Thursday as investors revised their expectations of when British interest rates will start to rise. The pound has gained almost 2 percent against the dollar since Wednesday morning, boosted by numbers showing wages grew at their fastest rate in nearly four years in April and by hawkish comments on interest rates from a Bank of England policymaker.
On Thursday, sterling hit a seven-month high of $1.5930 after UK retail sales data. The numbers showed growth slowed last month, but they beat expectations on a month-on-month basis. Also helping the pound was a cautious statement by the Federal Reserve on Wednesday evening, which disappointed investors expecting a clear signal on when US rates would start to rise, dragging down the dollar.
An increase in US inflation did little to turn that round and by 1422 GMT, sterling was 0.4 percent higher at $1.5896. "Really what's happening is that investors have not been paying too much attention to the pound, because the focus has all been about the Fed," said Michael Sneyd, a currency strategist at BNP Paribas. "The wage data yesterday re-ignited expectations that the Bank of England would have to raise rates soon, because the amount of spare capacity has started to shrink."
Investors were now expecting the BoE to begin raising rates in May, Sneyd said, after betting on August before Wednesday's wages data. BNP Paribas expects a first rise in February. Against the BoE's trade-weighted basket, sterling rose to 93.1, its strongest since July 2008. It dipped 0.2 percent to 71.71 pence per euro. On Wednesday evening, BoE policymaker Kristin Forbes said the next move in UK rates would be up and that it would come in the "not-too-distant future", as wage growth accelerates.
Some strategists say sterling is also functioning as a kind of safe-haven currency, as investors worry that Greece and its creditors will fail to reach a deal, leading a default and "Grexit" from the euro. "It's hard to quantify in any specific manner ... but we have seen sterling act as a safe-haven currency before," said Neil Mellor, a currency strategist at Bank of New York Mellon.
"The fact that it has always been seen as a proxy for euro zone exposure is why it's attracted this moniker of 'safe haven'." "It's a highly liquid currency ... and the UK is not doing badly, relatively speaking, so it's like a substitute dollar, if you like, particularly at the moment, when the Fed seems to be equivocating more than the Bank of England."