Pound Soars as Traders Amp Up Rate Hike Bets After Strong UK PMI

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(Bloomberg) -- The pound soared as traders upped bets on Bank of England rate hikes after British companies unexpectedly reported the first growth in seven months.

Sterling rose as much as 0.6% to $1.2114, leading gains among the world’s major currencies on Tuesday, after a S&P Global survey of purchasing managers also showed a “sustained increase” in prices. The data prompted traders to fully price a quarter-point hike at the UK central bank’s next meeting and to up the expected peak rate. 

“The upside surprise in UK manufacturing and services PMI data is a welcome bellwether for the UK economy,” said Sam Cooper, a trader at Silicon Valley Bank. “Sterling, which has been on the back-foot of late, clearly appreciates the news.”

The pound has struggled for direction recently and is little changed so far in 2023, yet positive economic data is now helping to buoy it. Progress in Northern Ireland Brexit talks may also be aiding the UK currency at the margin too.  

Gilts sold off after the PMI data, pushing the two-year yield as high as 14 basis points to 3.86%. Shorter maturities led losses, further inverting the yield curve. Traders now see the BOE taking the key rate to around 4.6% by September, up over 10 basis points from Monday.

The pound rose as much as 0.7% against the euro to around 88 pence, its largest daily increase in a month. Yet some remained skeptical the rally has legs. 

“Sterling strength today will likely be faded when the dust settles — say 0.88 in EUR/GBP if we get there,” said Jordan Rochester, a currency strategist at Nomura, citing UK real estate and insolvency data as pointing to economic difficulty ahead.