Pound Surges As Traders Pare Rate Cut Bets After PMI Beat

(Bloomberg) -- The pound surged and gilts flipped to losses after stronger-than-expected UK private sector activity data led traders to temper their expectations of monetary easing by the Bank of England this year.

The currency jumped as much as 0.7%, before paring gains to trade 0.4% higher at $1.2741, still on track for the biggest daily increase in more than a month. UK government bonds erased an earlier advance, with the 10-year yield reaching 4% for the first time since mid-December. Markets also moved to price fewer and later interest-rate cuts. 

The moves follow the release of S&P Global’s Composite Purchasing Managers’ Index, which surprisingly rose in January to the highest level in seven months. It also showed Britain’s private sector firms reported the sharpest jump in costs in five months.

“Strong PMI numbers from the UK, which despite all the fretting about the risk of the UK slipping into recession, suggest the economic outlook is looking quite bright still,” said Stuart Cole, chief macro economist at Equiti Capital in London. “Robust growth and strengthening price pressures are not a scenario the BOE will want to be loosening policy into.”

Traders have been trimming rate-cut bets since the start of the year and the repricing sped up last week when the UK’s December inflation reading came in higher than economists had expected. Swaps tied to the central bank’s meetings now imply 95 basis points of cuts this year, compared to about 130 basis points last week and 150 basis points in December.

The timing of the first rate reduction has also been pushed back. The market is pricing zero chance of a cut in March for the first time since mid-December and a quarter-point move is only fully priced by August, from June on Tuesday.

“This economic resilience should, we believe, deter the BOE from signaling that lower rates are on the way any time soon,” said Matthew Ryan, head of market strategy at Ebury. This will provide “plenty of support for the pound.”

Sterling has been the best performing Group-of-10 currency against the US dollar so far this year and is trading at strong levels on several crosses. The pound is fluctuating around its highest level against the yen since 2015 and its strongest level against the euro in over four months.

The focus among rate watchers switches next to the European Central Bank’s meeting on Thursday. ECB officials have pushed back against market bets on early rate cuts as the bank continues its fight against inflation.

“The UK economy continues to outperform relative to the euro zone, fueling more upside for sterling on crosses as a consequence,” said Nick Rees, an FX analyst at Monex Europe. Yet, sterling’s upside against the euro could be capped in the near-term by “what is likely to be a hawkish ECB tomorrow,” he added.

(Updates market pricing, adds context on pound’s outperformance this year.)

More stories like this are available on bloomberg.com

©2024 Bloomberg L.P.