Sterling hits 5 1/2 year high as economy keeps on giving

LONDON: A surge in retail sales last month and signs some Bank of England policymakers are leaning towards an increase in interest rates drove sterling half a percent higher on Wednesday, to its highest in 5 1/2 years on a trade-weighted basis.

Doubts have emerged over the past couple of months about the pound's ability to build on a 10 percent gain in the past year. Those gains have taken it to levels not seen since the aftermath of the financial crisis in 2008.

But despite some analysts' concern that the best economic news may now be in, retail sales in April jumped by 6.9 percent on the year and 1.3 percent on the month. That easily beat forecasts of 5.2 annual and 0.5 percent monthly growth.

Sterling jumped against both the euro and dollar in response, hitting a series of 16-month highs against the single currency.

"The big question is whether all of this good economic news is priced in to sterling," said Graham Davidson, a currency dealer with NAB in London. "For the moment as long as the prints are this good I think the market is quite happy staying long sterling."

The Bank of England's report last week on inflation and the outlook for interest rates went some way towards quelling expectations it might raise rates as early as this year. But the market still looks for a rise early next year, taking the premium on the pound well above its peers in Europe and the United States.

Wednesday's minutes showed some members of the BoE's 9-strong board thought the debate on rates was already becoming "more balanced".

"Governor Mark Carney attempted to dampen interest rates expectations in last week's BoE Inflation report," said Nawaz Ali, UK Market Analyst with Western Union Business Solutions.

"The pound's spike this morning suggests investors are finding a very different policy outlook based on today's meeting minutes. The prospect of sterling rising above $1.7000 against the US dollar is growing."

Against the dollar, the pound gained to $1.6922 after the figures, its highest in almost two weeks, before retreating a touch.

Gilt futures turned negative and were last down 16 ticks on the day. The yield spread between 10-year British and German government bonds rose by around 3 basis points to 128.5 basis points, its highest this week.