Sterling nears 5-year high after hitting $1.70 mark

 

The pound smashed through the $1.70 mark today as imminent interest-rate rises and violence in the Middle sent dealers rushing to bet on sterling.

The pound has not traded above the psychological benchmark since August 2009 but reached $1.7011 in trading today with currency markets still reverberating from Bank of England Governor Mark Carney’s warning last week that interest rates could rise sooner than anticipated.

Expectations of a move as soon as November were heightened when outgoing Deputy Governor Sir Charlie Bean said he would “welcome us getting on to the path of normalisation, as a demonstration that the economy is healing” in a weekend interview.

While good for holidaymakers who are heading to the US or the eurozone, a strong pound is bad news for the  UK’s efforts to trade its way to a sustainable recovery.

The push into the pound was accentuated by the latest crisis in Iraq, which kept up pressure on oil prices as well as boosting demand for safe-haven currencies including Japan’s yen and the Swiss franc.

Sterling failed to hold above $1.70 as automated selling instructions kicked in. But Neil Mellor, analyst at BNY Mellon, said the next target for sterling was the August 2009 highs of $1.7050, which, if breached, would leave the pound at the highest level against the dollar since before the collapse of Lehman Brothers in September 2008.

“If it takes that level out there could be quite a significant move,” he said.

MC Markets analyst Michael Hewson added that there could be “fireworks” in currency markets if the August 2009 peak was breached. Currency markets are now focused on the minutes of the Bank of England’s June meeting to be published on Wednesday.

Signs of dissenting votes for interest-rate rises on the nine-strong monetary policy committee could give the pound another kick higher.

Simon Smith, head of research at FxPro, said: “There is a decent chance that we could see at least one member voting for higher rates, which would give further support to sterling at these higher levels.”

None of the MPC has voted for an interest-rate rise since July 2011, although Carney’s U-turn gives the “impression of a central bank which has been running behind the curve”, according to Commerzbank’s Peter Dixon.

The Bank has stressed that interest-rate rises will be “limited and gradual” but some MPC members have said  they might have to start sooner.

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