The pound strengthened after UK retail sales rose more than forecast in August, boosting investor expectations that the Bank of England will raise borrowing costs in the coming months.
Sterling advanced against the dollar for a second day as retail sales excluding automobile fuel rose 1% from July, 10 times the median forecast in a Bloomberg survey. Overnight, UK Prime Minister Theresa May and Foreign Secretary Boris Johnson appeared to have papered over their differences on Brexit, with the latter planning to attend her keynote speech in Florence after challenging her plan for leaving the European Union.
The pound has rallied almost 5% against the dollar this month after the central bank’s monetary policy committee said that it could move to raise rates “in the coming months.” Money markets are now pricing an almost 78% chance of a rate increase in November, with a hike fully priced in by next February.
“The data increases the likelihood of a hike in November as weak consumer spending has been of concern for the majority in the monetary policy committee,” said Richard Falkenhall, a Stockholm-based currency strategist at Skandinaviska Enskilda Banken AB. “This sort of positive surprise will continue to support the pound. I think people have to revise the view on UK growth in a positive direction.”
The pound traded 0.4% stronger at $1.3559 as of 10:43 am in London, after rising as high as $1.3607 earlier. The yield on 10-year gilts was steady at 1.33%.
With the Federal Reserve meeting later on Wednesday, the strong data “reduces the risk of being long-sterling into the meeting,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA. It also “keeps expectations firm”’ for a rate increase in the near future.
However, the Bank of England’s agents’ report accompanying the data said that the impact of sterling weakness on goods inflation may have already peaked.
This could mean that “if the BOE don’t go relatively soon, CPI will leak and then slow, making it harder to justify a hike,” said Bennett. “This is bad for sterling.”
Still, the British currency is likely to maintain some strength into Prime Minister May’s speech in Florence on Friday, where she is expected to issue an offer to the European Union on Britain’s exit payment.
“No one knows really what May will say but I’d be surprised if she says something that the market easily views as obviously sterling negative,” said Bennett.