April 18, 2014 1:20 pm

Rate rise speculation drives pound higher

Piles of pound coins©Rex Features

Sterling hit a four-year high against the dollar this week as investors considered the likelihood of a rate rise from the Bank of England, while the Federal Reserve looked like keeping its rates lower for longer.

Employment and wage data on Wednesday was the key to the pound’s move higher. The UK unemployment rate dipped to 6.9 per cent – below the 7 per cent indicated by the BoE’s initial forward guidance as the threshold at which it would consider lifting rates.

Furthermore, wage inflation picked up – the data showing average salary increases matching the rate of consumer inflation.

“Any thoughts of the BoE staying on hold longer than expected due to low CPI levels were dealt a severe blow by the data,” said analysts at Commerzbank.

Sterling was up only 0.3 per cent to $1.6785 versus the dollar over the week, but hit its highest mark against the US currency since November 2009.

The pound gained 0.8 per cent over the week to £0.8233 against the euro and was 1 per cent higher at Y171.73.

The dollar’s performance this week was hampered by comments from Janet Yellen, Fed chairwoman, who poured cold water on any speculation that she was setting a timetable for raising the Fed fund rate.

“Her comments included her expectation of a ‘considerable time’ between the end of QE and the first rate hike, which implies a longer period than the specific ‘six month’ timeframe she mentioned in the March 19 press conference,” said Robert Lynch at HSBC.

Yet, with investors nervous over the escalation of tensions between Russia and Ukraine, the US currency provided a haven and still managed gains against the euro and the yen, climbing 0.4 per cent over the week to $1.3831 and 0.6 per cent to Y102.19 respectively.

Investors backed away also from riskier trades that had become popular again in recent weeks – namely, the carry trade, where funds are borrowed in low yielding currencies to be invested in higher yielding assets.

Carry had helped push the Australian and New Zealand dollars higher since the end of January, but they fell this week, down 0.6 per cent to $0.9338 and 1 per cent to $0.8586 respectively.

Likewise, emerging market currencies had a tougher time this week as the recent rally stalled. India’s rupee eased 0.2 per cent to Rs60.2912.

“Carry trades are running into trouble from two sides,” said Hans Redeker at Morgan Stanley. “First, the US economy looks like it is gaining momentum, and second, revived optimism concerning the EM outlook has gone too far.”

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