Pound rides UK growth to star billing

PUBLISHED : Thursday, 02 January, 2014, 1:41am
UPDATED : Thursday, 02 January, 2014, 1:59am

The British pound was the strongest performer among a gauge of 10 developed-nation currencies in the second half of last year as improved economic data boosted bets the Bank of England will tighten monetary policy.

Sterling matched the highest level in more than two years against the US dollar yesterday after third-quarter growth came in at the fastest since 2010, spurring trader speculation the bank will raise interest rates earlier than its 2016 forecast.

The pound's gains countered its biggest quarterly drop since 2008 in the three months to March last year amid concern the economy was headed for an unprecedented triple-dip recession. "The turning point for the pound was the economic data," said Kathleen Brooks, European research director at Forex.Com.

"UK data surprised to the upside for most of the third quarter and parts of the fourth.

"It can be a very powerful driver when the market believes the Bank of England has got it wrong and is maybe behind the curve."

The pound was trading at US$1.6578 in London yesterday, matching the highest level on December 27, which was the strongest since August 2011.

Sterling tumbled to as low as US$1.4814 on July 9, the least since June 2010. The pound was trading at 83.11 pence per euro after appreciating 3.3 per cent in the past six months.

Central bank governor Mark Carney, who took up his post in July, pledged in August to keep the main interest rate at 0.5 per cent at least until unemployment fell to 7 per cent, subject to caveats on inflation and financial stability.

The Bank of England raised its forecasts last month and said the recovery had "taken hold" after the economy expanded 0.8 per cent in the third quarter.

The economy returned to growth in the first three months of last year after shrinking in the final two quarters of 2012.

Unemployment unexpectedly fell in the three months to October to the lowest in more than four years, approaching the central bank's 7 per cent threshold.

"It still looks most likely that the Bank of England may be the first major central bank to begin raising policy rates," said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ, citing yields on benchmark 10-year gilts at 3.02 per cent after touching 3.08 per cent on Friday.