The British Pound Sterling surged on Tuesday, October 10, after British industry data beat forecasts, cementing expectations that the Bank of England will raise rates at its next policy meeting in November.
British factories had their strongest two months of 2017 in July and August, suggesting the Bank of England remains on track to raise interest rates soon, but the deficit in trade in goods hit an all-time high.
The Office for National Statistics said on Tuesday that manufacturing output rose by a monthly 0.4 percent in August, faster than a forecast for output to rise 0.2 percent in a Reuters poll of economists.
After the data, the British pound added gains and was up 0.4 percent on the day at $1.3189 against the dollar. It was broadly unchanged against the euro.
The ONS numbers showed Britain’s economy remained in a low-growth gear in the third quarter after suffering its slowest first half to the year since 2012. Industrial output accounts for 14 percent of Britain’s overall economic output.
Sterling had already made gains on Monday after the Office for National Statistics (ONS) said British labour costs were growing more strongly than previously announced.
“The short sterling market has moved to price in an even greater probability of a BoE hike on the back of the ONS report,” Credit Agricole said in a note.
“Money markets are already pricing in more than 75 percent chance of a hike at the November inflation report.”
Concerns about turmoil within the governing Conservative party have subsided after British Prime Minister Theresa May vowed to ward off challenges to her leadership and signalled the possibility of a cabinet reshuffle.
But some strategists believe that markets are not taking into account political risks and focusing too much on possible rate hikes.
“The material deterioration in the political background has been largely ignored as monetary policy has dominated,” said Adam Cole, the head of FX Strategy at RBC. He recommended selling into the sterling rally, given the high possibility of a “GBP-negative events”.
Trevor Greetham, an analyst at Royal London Asset Management, agreed, Reuters reports.
”The Bank of England may find itself in the same credibility trap if interest rates rise while Brexit outcomes are unclear and economic data is soft,” he said.
