Sterling strengthens as investors bet on November BoE hike

LONDON (Reuters) - Sterling strengthened against the dollar on Wednesday, as data showing British retail sales unexpectedly surged in August bolstered expectations the Bank of England will lift rates from record lows before year-end.

An English five pound note and coins are seen at a restaurant in the British overseas territory of Gibraltar, July 21, 2016. REUTERS/Jon Nazca/FILE PHOTO

Sterling jumped by almost a cent against the dollar on the publication of the numbers, which showed monthly sales growth accelerated to 1.0 percent, the fastest since April and easily beating forecasts of a 0.2 percent increase.

The pound then eased back, after a BoE agents' report showed subdued pay growth across British companies and weaker investment intentions. But it was still trading 0.6 percent higher on the day by 1745 GMT at $1.3586 GBP=D3, around half a cent away from a 15-month high touched on Monday.

A Reuters poll on Wednesday found that almost two-thirds of economists now expect a BoE rate hike to come in November, though three quarters of those queried believed that tightening policy then would be a mistake.

“Despite our weak growth forecasts, we think that the reassessment of supply and the need to prop up sterling is likely to make the BoE hike in November,” Credit Suisse analysts said in a note to clients on Wednesday.

“We think a rate hike in November (against) the backdrop of weak growth, high-currency-generated inflation but weak wage pressures and uncertainty is likely to be a policy mistake,” they said. However, the hike is expected to be a one-off rather than the start of a tightening cycle, they added.

Sterling was trading slightly more strongly against the dollar than the euro, with traders cautious ahead of the U.S. Federal Reserve’s latest policy statement, due at 1800 GMT.

It was 0.4 percent up on the day at 88.37 pence per euro EURGBP=D3.

The pound rose by almost 4 percent on a trade-weighted basis last week, after the BoE said it was likely to raise interest rates in the “coming months” if the economy and inflation pressures strengthen as anticipated. Policymakers from the Bank have reinforced that message in subsequent comments.

But market players still saw political headwinds for the currency, and said a speech Prime Minister Theresa May was to give in Italy on Friday about the outlook for Britain’s planned exit from the European Union could knock sterling back.

“Politics continues to cloud the UK outlook, leading some macro investors to declare sterling as ‘untradeable’,” Nomura currency analyst Jordan Rochester said in a note to clients.

“‘Brexit clarity’ is not to be underestimated. The speech will likely represent another and important stepping stone towards understanding how the UK plans to achieve Brexit and what it might look like, he said.

Rochester said it was this “Brexit clarity” that had driven a 3 percent rally in sterling in January on the day May made a speech that was interpreted as indicating a “hard Brexit” - a complete break in political and economic ties with the EU.

Reporting by Jemima Kelly; Editing by Mark Heinrich