- The Pound Surges to a Post-Brexit High
The pound climbed to the highest level against the dollar since just after the Brexit vote and U.K. government bonds tumbled as Bank of England policy maker Gertjan Vlieghe stoked speculation of an interest-rate increase within months.
Sterling surged past $1.36 after Vlieghe, considered a dovish monetary policy voter, turned hawkish to tell a conference the moment was approaching for a rate hike. The premium to hold call options on the pound relative to puts rose to the widest since 2009, as markets moved to price two rate increases next year.
The pound is the world’s best-performing major currency this month as the central bank’s comments suggest it’s willing to look past sluggish wage growth to remove the monetary stimulus put in place after last year’s Brexit vote.
“The evolution of the data is increasingly suggesting that we are approaching the moment when the bank rate may need to rise,” Vlieghe said in a speech at the Society of Business Economists in London. If the economy continues apace, “the appropriate time for a rise in the bank rate might be as early as in the coming months.”
Sterling rose 1.4 percent to $1.3588 as of 11:51 a.m. in London, having reached $1.3616, its highest level since June 24, 2016, the day after the Brexit vote. The pound strengthened for a sixth day versus the euro, gaining as much as 1.4 percent to 87.74 pence.
The yield on two-year U.K. gilts climbed 11 basis points to 0.49 percent, the highest since June 23, 2016. Benchmark 10-year gilt yields jumped 11 basis points to 1.34 percent, a level not reached since Feb. 6.
Pulling the Trigger
Money markets are now pricing an almost 75 percent chance of a rate increase in November, with a 25-basis-point rise fully priced for February and a second one by December 2018.
“If they pull the trigger once they’ll almost certainly go again,” said Ross Walker, an economist at NatWest Markets. “The market will price in more until it’s shown to be a policy error or the U.K. economy slows.”
Data this week showed U.K. inflation approaching a five-year high, while unemployment was low. Wages remained subdued but with a tighter labor market and the potential for domestic price pressures, the hawks may want to get ahead of the curve.
“The important question now is what the MPC means with ‘over the coming months’,” said Commerzbank AG strategist Lutz Karpowitz in a research note published before Vlieghe’s comments. “The longer this period is going to be, the higher the risk that the economy starts cooling, thus taking the pressure off the BOE.”