Money Pound Heads for Weekly Gain on Prospect of Tighter BOE Policy

17:36  14 july  2017
17:36  14 july  2017 Source:   bloomberg.com

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The pound was set for a weekly advance against the dollar as the prospect of tighter monetary policy in the U.K. combined with pared bets for U.S. rate rises. Hawkish BOE rhetoric helps currency weather weak U.K. data. Nomura sees ‘more than enough reason’ for improvement in pound .

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(Bloomberg) -- The pound was set for a weekly advance against the dollar as the prospect of tighter monetary policy in the U.K. combined with pared bets for U.S. rate rises.

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Sterling, which touched a one-week high on Friday, has stayed relatively well supported in the face of U.K. economic data missing forecasts and uncertainty related to Brexit. That comes after some Bank of England policy makers called for a move away from stimulus and higher interest rates. The British currency climbed versus a broadly weaker dollar, as U.S. headline inflation data due on Friday is seen slowing, and after Federal Reserve Chair Janet Yellen signaled on Wednesday the central bank won’t rush to tighten monetary policy.

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Sterling headed for its first weekly gain since February and gilts declined as market expectations shifted toward tighter policy in the U.K. The pound has been prone to large swings this week , often without obvious catalysts

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  • GBP/USD climbs 0.2% to 1.2965, having earlier touched 1.2969, its highest since July 7
    • The pair is heading for a 0.6% gain this week; a bullish ‘flag’ pattern completes; projection techniques point to 1.3350 test
    • Resistance at 1.2984, July 6 high, support at 1.2907, July 12 high
  • EUR/GBP -0.1% at 0.8801, set for weekly decline of 0.5 percent
  • Short EUR/GBP “continues to look attractive even after the move lower and we continue to see the risk reward being in long GBP,” analysts at Nomura, including Jordan Rochester, write in a client note
    • “Rather than cutting our losses and stopping out of our EUR/GBP leg, we see more than enough reason to expect an improvement in sterling’s fortunes, or if anything a bias to expect further deterioration in EUR against GBP” into next week’s European Central Bank meeting
    • Nomura analysts say “expectations of a hawkish shift are high” from the ECB, without which the euro could weaken versus sterling. They also expect the BOE to raise rates in August
  • Markets currently price in about a 57 percent chance of a 25-basis-point hike by the end of this year, according to MPC-dated SONIA
  • Analysts at Citigroup Inc. differ from Nomura and don’t think the BOE can tighten policy in the face of a slowing economy
    • The big winner from that could be gilts, with Citi’s London-based strategist Jamie Searle predicting the spread of U.K. bond yields over their German peers could drop below 50 basis points, the lowest since 2013: chart
  • Yield on 10-year gilts falls 2 bps to 1.28%, set for weekly fall of 3 bps

--With assistance from Sejul Gokal

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, David Goodman

©2017 Bloomberg L.P.

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