April 10, 2018 / 7:59 AM / 10 days ago

Sterling basks at 2-week highs but risks grow

LONDON (Reuters) - Sterling hit a two-week high on Tuesday as firm risk appetite and a top policymaker’s comment that the Bank of England should not delay an interest rate hike boosted bets in a market that is already long in the British currency.

Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

Markets see an 80 percent probability of a rate hike in May and the latest comments and strong housing survey data this week offered further encouragement.

Ian McCafferty, one of two policymakers on the nine-member Monetary Policy Committee who voted for a rate rise last month, told Reuters in an interview that wage growth might prove stronger than most of his colleagues thought, adding to pressure on inflation that is running above the BoE’s target.

“The pound remains bid due to the global backdrop, seasonal demand and Mcafferty’s comments,” said Neil Jones, head of hedge fund sales at Mizuho Bank Ltd.

Sterling edged higher after Mcafferty’s interview was published and hit a day’s high of $1.4170 against a broadly sturdy dollar. Against the euro, it strengthened to 87.08 pence

The British currency has rallied more than 1.5 percent in the last three trading sessions. Market watchers say a successful break above the $1.4252 line would put sterling on track to test a 2018 high of $1.4346 hit in late January.

Its gains against the struggling euro have been even more pronounced. Sterling has strengthened 1 percent so far this month after a 2 percent rally in March.

“This an interesting level technically ... recent data and positioning seem to be weighing on the euro,” said John Marley, head of FX strategy at Infinity International, a currency risk management firm.

April tends to be a strong month for the British currency, according to recent analysis by strategists at Bank of America Merrill Lynch. They said dividend payments by UK companies have helped sterling to rally every April for the last 14 years.

The BoE raised rates for the first time in more than a decade in November and a recent string of strong data including house price data on Monday have virtually sealed the case for a second rate increase in May.

But positioning is already long according to various survey data and poll forecasts and therefore the market may be vulnerable to a selloff if a correction materialises or data surprises on the downside.

Reporting by Saikat Chatterjee; Editing by Raissa Kasolowsky

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