Sterling hit a five-week high against a trade-weighted basket of currencies on Thursday, as traders brought forward their bets on when UK interest rates would rise after the US Federal Reserve signalled it could raise rates as soon as December. The Bank of England is expected to become the second major central bank to hike interest rates since the financial crisis, in contrast to the European Central Bank, which said last week it was it was prepared to implement yet further easing measures in the euro zone, Britain's biggest trading partner.
The pound hit 71.45 pence per euro, its strongest since August 20, as investors brought forward their BoE rate hike expectations to the third quarter of 2016, from the fourth quarter before the Fed statement. Although sterling edged a little lower on Thursday, to 71.65 pence, it stayed close to that high, and was 0.2 percent higher against the dollar, at $1.5300. Against the BoE's trade-weighted currency index, it stood at 92.8, its strongest since September 21.
The BoE, which holds a policy meeting next week, has said it does not need to wait for the Fed before it raises rates. But many investors reckon the BoE's monetary policy committee (MPC) would not risk going first. "The fact that there is a macro argument for the UK to raise rates first reaffirms our view that the MPC will welcome the chance to do so if the Fed moves in December," wrote HSBC analysts. "But strategically, it may not move without this comfort blanket."
In mid-2014, after BoE Governor Mark Carney said rates could rise sooner than expected, sterling rose to six-year high of just under $1.72 - a level that Morgan Stanley's head of European G10 currency strategy, Ian Stannard, said the bank would not want to see again. "The Bank of England will not specifically cite the currency and they won't specifically say they'll wait for the Fed, but there's a market perception that they will wait for the Fed, because they don't want sterling going higher," he said.
Apart from considering the Fed's moves, the BoE will also be looking closely at domestic economic data, which has suggested a period of rapid expansion might be ending. Earlier in the week numbers showed British economic growth slowed more than expected in the three months to September, to 0.5 percent on a quarterly basis. Earlier in the month inflation was shown to have dipped back below zero.