The pound has outperformed most peers this year as investors bet that an improving unemployment rate and a predicted 2015 growth rate of 2.5% will prompt the BoE’s first rate increase since 2007

Bloomberg
London


The pound - set for its first monthly gain on a trade-weighted basis since July - may be a key focus for Bank of England policy makers as they consider when to increase UK interest rates.
Sterling headed for its biggest monthly gain versus the euro in almost five years. With the Federal Reserve bolstering speculation that it will move before the end of the year, BoE officials meeting in London next week to discuss new forecasts for growth and inflation will have to weigh their desire to prepare households for higher borrowing costs against the risks of encouraging further sterling strength that could potentially damage Britain’s recovery.
“The Bank of England has to tread pretty carefully,” said John Wraith, head of UK rates strategy at UBS Group in London. “If it gets too opinionated about UK policy tightening and heads off rapidly in the opposite direction to everyone else, they really will put a rocket under sterling which will give them real problems in terms of imported inflation.”
The pound has outperformed most peers this year as investors bet that an improving unemployment rate and a predicted 2015 growth rate of 2.5% will prompt the BoE’s first rate increase since 2007. That pushed a trade-weighted measure of the currency to a seven-year high in August. It rose 1.8% since the end of September, its biggest monthly advance since June.
The pound appreciated 1% last week to 71.24 pence per euro in London. Sterling strengthened 3.6% against the shared currency last month, which would be the most since November 2010. The pound climbed 0.9% to $1.5458, headed for its first monthly gain versus the dollar since June.
The central bank is due to publish new forecasts for growth and inflation alongside its latest policy decision and a record of how each member voted on November 5. While the pound has risen, it’s still about 2% lower than the starting point for August’s forecasts, meaning the growth and inflation forecasts could be increased.
Sterling reached its strongest level in two months against the euro on Friday, after Fed officials on October 28 revived speculation they will move in December, which many investors view as a precursor to a liftoff by the BoE. That heightens the potential for further divergence in policy between the UK and the euro area, where European Central Bank President Mario Draghi has said policy makers will reexamine the scope of their quantitative-easing plan in December.
While the possibility of more ECB asset purchases has added to upward pressure on sterling against the euro, more stimulus in the UK’s biggest trading partner could prove a boon for the British economy, according to Mike Amey, a London-based money manager at Pacific Investment Management Co.