* GBP rises after forecast-busting UK retail sales data
* 10-yr UK gilts yields soar to 2-year high
* SONIA rates inching towards pricing a rate move in 18
By Anirban Nag
LONDON, Aug 15 Sterling hit a two-month high
against the dollar while 10-year gilt yields rose to two-year
peaks on Thursday after UK retail sales beat forecasts and
bolstered expectations of early monetary tightening.
Investors steadily brought forward expectations of a hike in
the bank rate, currently at 0.5 percent. Sterling overnight
interbank average rates (SONIA)- the very short-term interest
rates that form the basis of lending costs to the wider economy
- inched towards pricing in a first move in 18 months, compared
with two years on Wednesday.
Currently under its "forward guidance" plan, the Bank of
England expects to keep rates low until the end of 2016 when it
expects the jobless rate to fall to 7 percent. But a steady
improvement in data is leading to doubts whether the guidance
plan can keep rates anchored for that long.
Retail sales for July rose 1.1 percent from a month earlier,
easily beating expectations of a 0.6 percent rise. That comes
after a string of recent releases, ranging from rising house
prices to a jump in services activity and a brighter prospect
for the job market.
Sterling was up 0.5 percent at $1.5585, having
hit$1.5591, its highest level since mid-June. The euro was down
at 85.23 pence, a 1-1/2 month low, while against a
trade-weighted basket, sterling was at 81.40, a
"Consecutive data surprises have pushed sterling higher with
the SONIA rates rising and the back-end of the gilt curve
steepening," said Adam Myers, head of European FX strategy at
Credit Agricole. "Markets are wondering if the BoE forward
guidance is backfiring."
The 10-year gilt yield sat at two-year highs of
2.657 percent, according to Reuters data.
UNWARRANTED FINANCIAL TIGHTENING
The 18-month SONIA rate rose to 0.4965 percent after the
retail sales data, from 0.4900 percent beforehand and 0.47125 on
Wednesday morning. The two-year SONIA rose to 0.5575 percent
from 0.54875 percent beforehand as investors are increasingly
pricing in a greater chance of a rate hike in 2015 by the
Those expectations were bolstered on Wednesday after the
jobs report pointed to a brighter outlook and Bank of England
minutes showed an unexpected division among policymakers about
the guidance plan.
The steady shift in expectations has taken markets' view of
the Bank of England rate outlook back to where it was in late
June, just before Mark Carney became governor. Soon after taking
over on July 1, Carney dampened expectations of an early move by
calling a rise in short-term money market rates "unwarranted".
"Tighter financial conditions are the last thing the Bank
wants and, as such, we believe that Carney will attempt to
verbally push back market pricing over the coming weeks," Morgan
Stanley said in a morning note.