Sterling hits 3 1/2-month high

Sterling soared to a 3 1/2-month high against a trade-weighted basket of currencies on Thursday, bolstered by a robust retail sales report for April and which diminished chances of an interest rate cut that some investors are factoring in. Retail sales increased 1.3 percent in April from a month ago, beating forecasts of a 0.5 percent rise, and gaining 4.3 percent on an annual basis. Sterling's trade-weighted index rose to 87.9, its highest since February 5, before it edged back in the afternoon session to trade at 87.7, still 0.5 percent higher on the day.
Earlier, sterling rose to a two-week high of $1.4663 while the euro slumped to 76.485 pence against the pound, its lowest since early February. It was trading at 76.72 pence before the retail sales data were released. The pound gained on Wednesday after an Ipsos-Mori poll showed 55 percent of those surveyed supported staying in the European Union and just 37 percent wanted to leave. Earlier, a YouGov poll had showed the "In" camp with a four-point lead.
Betting odds on Thursday indicated the highest chance to date of Britain voting to stay in the European Union, with the implied probability of a vote for membership rising to as high as 83 percent. William Hill cut its odds an "In" vote to 1/5, the lowest level to date and indicating an implied probability of 83 percent, a spokesman said. Betfair odds indicated a 77.5 percent chance of an "In" vote, up from 70 percent last week. "Sterling has been an outperformer in the past 48 hours as expectations are rising that Britain will remain in the EU, and the retail sales numbers have added to that gloss," said Alvin Tan, currency strategist at Societe Generale.
The retail sales numbers came during a week of mixed economic reports that showed inflation was subdued but the job market resilient. Surveys of construction, manufacturing and services at the start of the month all indicated a slowdown in the second quarter. "The better-than-expected figures will lend support to UK markets and add to confidence that despite referendum worries consumer spending is growing," said Ana Thaker, a market economist at PhillipCapital UK, which has $28 billion in assets under management.
Short-term British interest rate futures showed investors unwinding expectations that rates would fall after the referendum. Though the Bank of England has said its next move is likely to be a rate rise, some investors had bet that a vote to leave would lead to a rate cut, to shore up the economy. Worries about a possible Brexit have weighed on the pound since late last year, driving an 8 percent decline in the past six months on a trade-weighted basis. But since hitting a 2 1/2-year low last month, sterling has recovered by around 4 percent.