BoE expectations boost pound to three-and-a half-week high vs euro

LONDON (Reuters) - Britain’s pound rose to a three-and-a-half-week high against the euro on Monday, helped by speculation that the Bank of England may sound more hawkish on interest rates this week in defence of the currency.

An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration/File Photo

Sterling hit a five-week high against the dollar last Friday after better-than-expected manufacturing numbers, and market data showed a month-long build up of speculative bets against the currency stalled in the week to last Tuesday. [IMM/FX]

That does not represent a full quelling of the unease that has gathered over sterling in the first months of Brexit negotiations.

But it comes ahead of a Bank of England meeting on Thursday that some analysts and traders believe could show it is increasingly worried about the weak pound’s effect on inflation.

“The firmer growth developments (last week) should provide more confidence to the BoE that economic growth is still holding up relatively well since the Brexit vote,” said Lee Hardman, a currency analyst at Japan’s MUFG.

“We expect the BoE to reiterate this week that the market is underestimating the scale of rate hikes likely in the coming years, although they will likely stop short of signalling a rate hike is imminent this year.”

Against the euro, that mood helped the pound strengthen to less than 91 pence per euro for the first time since Aug. 18, gaining 0.3 percent on the day against a broadly weaker euro.

Against the dollar, sterling dipped 0.1 percent to $1.3182, less than half a cent away from a five-week high reached on Friday.

Stephen Gallo, head of European currency strategy at BMO, said the bank had revised up its forecasts for sterling, largely because of predicted weakness in the dollar.

In six months, BMO expects sterling to weaken to $1.29, up from a forecast of $1.23 previously but still under pressure because of political uncertainty. But in 12 months, the bank sees sterling up at $1.37, having previously forecast it at $1.31.

“The pressures from the balance of payments in the UK continues to improve...and in terms of the negotiations we think that by 12 months’ time the Brexit discussions will have shifted to a transitional trade deal,” Gallo said.

Editing by Mark Trevelyan