Sterling index at 5-1/2 year high, awaits Carney's speech

LONDON: Sterling soared to a 5-1/2 year high against a basket of currencies on Thursday, bolstered by strong gains against the euro as investors added favourable bets on the pound on the back of more robust economic data.

British house prices continued to tick up with the Royal Institution of Chartered Surveyors (RICS) saying that its main house price balance rose too +57 last month from an upwardly revised +55 in April. That was above a forecast of +52 in a Reuters poll.

Coming a day after a robust UK jobs report, the data bolstered the case for monetary tightening by the Bank of England with investors pricing in the chance of a hike in the first quarter of next year.

The trade-weighted sterling index rose to 87.4, its highest since late 2008. Britain's increasingly robust recovery has driven a 7.2 percent gain for the pound in trade-weighted terms over the past year, and fuelled expectations the BoE would be one of the first major central banks to raise rates.

The euro fell 0.3 percent to 80.365 pence, its lowest since December 2012. The euro has lost 1.3 percent against the pound since the European Central Bank cut interest rates and announced other measures to counter disinflation in the euro zone.

The diverging policy outlook between the Bank of England and the ECB has pushed the difference in yields between British and German 10-year government bonds to its widest since 1997. Lower short-term money market rates were also weighing on the single currency.

Traders said the focus was now on the Mansion House speeches later on Thursday by Bank of England Governor Mark Carney and Chancellor George Osborne. Analysts said there is a risk that BoE chief Carney may reiterate his pledge to keep rates low, and that could have a bearing on the pound.

"While we remain constructive on the pound we do see a risk that Governor Carney may reiterate his more cautious assessment of the UK economic outlook, that it warrants an easy monetary policy stance for longer," said Valentin Marinov, currency strategist at Citi.

"All that need not discourage sterling bulls. We expect more hawkish rhetoric to come from the BoE minutes next week."

The minutes are likely to show a growing debate within the monetary policy committee about the need to tighten.

And while recent economic signs have been positive, inflation is still below target and the recovery has largely been linked to a housing market that might take fright at a rise in rates, some analysts argue.

Many in the market are also a bit wary ahead of next week's financial policy committee meeting where policymakers are likely to take steps to cool the housing market. That could give the BoE more time to keep monetary policy easy.

Nevertheless, sterling traded 0.3 percent higher at $1.6840 , although further gains depend on how U.S. retail sales data later in the day pan out. U.S. yields have been climbing in the past few weeks and have lent some support to the dollar.

Also, if next week's minutes cool rate hike expectations, the pound could give up some gains.

"If next week's minutes do not support optimism amongst traders about earlier interest rate hikes, profit-taking could again unravel the pound's latest gains," Nawaz Ali, analyst at Western Union.