U.K. Pound Strengthens on Interest-Rate Speculation in online fx trading as Retail Sales Surge

The pound reached a two-week high against the dollar after U.K. in online fx trading, retail sales surged last month by almost four times the amount forecast by economists, adding to signs the Bank of England has room to raise interest rates.

The pound rose as much as 0.4 percent to $1.6231, the strongest intraday level since Feb. 3, before trading at $1.6207 at 12:48 p.m. in London. Britain’s currency strengthened 0.3 percent versus the euro to 83.90 pence.
The yield on the 10-year gilt increased five basis points to 3.81 percent. Two-year note yields, typically more sensitive to interest-rate expectations, rose six basis points to 1.52 percent.

Pressure on the Bank of England to raise its key rate from a record low of 0.5 percent increased this week after a Feb. 15 report showed inflation accelerated to double the central bank’s 2 percent target. Consumer-price growth accelerated to 4 percent in January, forcing central bank Governor Mervyn King to write a fifth letter to explain the monetary-policy stance.

Sterling surged yesterday after policy maker Andrew Sentance said in a speech in London that the central bank should raise rates to boost the pound as a means of curbing inflation. King dismissed the spurt in inflation in his letter to Osborne, saying raising rates quickly would hurt the economy, which unexpectedly shrank by 0.5 percent in the fourth quarter.

Money markets signal the Bank of England may boost its bank rate by about 75 basis points by year-end, according to the Sterling Overnight Interbank Average, or Sonia, Tullett Prebon Plc data shows. The implied yield on the December short-sterling futures contract rose nine basis points to 1.75 percent, indicating traders raised bets that borrowing costs will rise.

The U.K. 10-year breakeven rate, an indication of investors’ inflation expectations over the life of the securities, derived from the yield gap between conventional and index-linked bonds, was little changed at 3.17 percent.