LONDON: A surge in retail sales last month and signs some Bank of England policymakers are leaning towards a rise in interest rates drove sterling half a percent higher on Wednesday, to its strongest in 5 and a half 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 in response and made steady progress against the euro thereafter, hitting a 17-month high of 80.85 in afternoon trade. Against the dollar, it fell back after hitting a high of $1.6922 after the data.
"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 that 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."
POLITICAL RISKS
A number of big event risks are coming over the horizon for sterling. September sees Scotland vote on whether to leave the United Kingdom and potentially either leave the pound or force the creation of a new currency union.
Tightly fought European elections this week also highlight the risks of another messy national poll in a year's time. Many strategists and dealers say the market is keen to avoid an administration led by the opposition Labour party, which slipped behind in some new polls last week.
The fading of the rally against the dollar as the day wore on, however, looked largely in line with the bearish view of many dealers on the euro's prospects against the dollar.
With the European Central Bank set to ease policy next month and the U.S. Federal Reserve continuing to rein in at least its policy of money-printing if not actually raise base interest rates, some think the dollar gains predicted at the start of this year by many banks may finally materalise.
If the BoE raises rates, that will only add to the premium for the pound over the euro.
"While we expect the doves to dominate the MPC for some time yet, it is possible that one or two hawks will be voting for a rate rise as soon as the autumn," said Jane Foley, a strategist with Rabobank in London.
"We continue to favour selling rallies in the euro (against sterling) based on our view of a slow moves towards 0.80 medium-term," she said.
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