Sterling rebounded from a two-month low on Wednesday to trade back above $1.27, after Bank of England Chief Economist Andy Haldane signalled he would weigh in behind a rise in interest rates in the second half of this year.
The pound had earlier sunk beneath $1.26 for the first time since mid-April as investors worried about Prime Minister Theresa May struggling to find the support she needs for her government, which lost its parliamentary majority in elections just under two weeks ago.
But it reversed those falls as the chief economist’s speech was published, trading up 0.6 percent on the day to reach as high as $1.2710. Against the euro, it rose 0.4 percent to 87.78 pence .
Haldane’s comments ran contrary to those of Governor Mark Carney, who had driven the pound lower on Tuesday by saying “now was not the time” to begin to raise rates. Bets on a rate hike within the next year surged. Short sterling contracts for December reversed all of their gains since Carney’s speech, showing markets pricing in a greater than 50 percent chance of the Bank raising rates by then.
British gilt futures also shed around 25 ticks and government bond yields hit session highs. “Here are some hawkish comments that are causing the market short end of the rates market to reprice, and to price a greater probability of tightening, and sterling is responding to that,” said Barclays currency strategist Hamish Pepper, in London.
“There was a period of time in which it was all about politics for the currency – how big the political risk premium should be and so on – but for a while now we’ve been trading more like a normal currency, where data surprises and central bank rhetoric drives the normal kinds of reactions.”
Pepper added that the market – and Barclays – had thought it very unlikely that the BoE would be raising rates any time soon.