Sterling Surges After BOE's Carney Signals Rate Hike--Update

By Dow Jones Business News, 

By Josie Cox

Sterling surged against a basket of currencies Friday, buoyed by the clearest signal yet that Britain's central bank is inching closer to ending five years of record-low borrowing costs.

The euro was trading around a 19-month low against the British pound, while sterling rallied to a more than one- month high against the U.S. dollar, before retreating slightly to hover around the 1.6980 mark by midmorning.

In an annual address held in the center of London's financial district, Bank of England Governor Mark Carney said Thursday that interest rates in the U.K. could rise sooner than investors expect, citing a recent economic growth spurt.

"We and most analysts had come in expecting a repetition of recent dovish comments," said Steve Englander, a currency strategist at Citigroup, adding that he now remains constructive on sterling and expects to see more gains against the euro.

Investors had largely been betting the BOE will begin raising its benchmark interest rate from a 320-year low of 0.5% early next year, perhaps in February.

Mr. Carney's remarks, however, are likely to make investors reassess. Some economists already expect the BOE will begin raising rates late in 2014.

"Given that the markets were already mostly priced for a first quarter of 2015 rate increase, the likely consequence of [his comments] is that expectations of a fourth quarter 2014 hike will now increase notably," said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ, adding that a November rate hike now seems the most plausible scenario.

On a note of caution, Mr. Carney pointed to early signs of a housing bubble and said that real estate posed "the greatest risk" to the domestic economy, heaping pressure on U.K. housebuilders' stocks.

In the FTSE 100, shares in Barratt Developments, British Land, Persimmon and Land Securities all dwindled, while Bovis Homes and Bellway dropped in the FTSE 250.

Elsewhere Friday, energy prices continued to climb as Iraq edged close to all-out sectarian conflict. Kurdish forces took control of a provincial capital in the oil-rich north on Thursday and Sunni militants threatened to march on two cities revered by Shiite Muslims and the capital.

Brent crude was up 0.79% at $113.30 a barrel. On Thursday, it saw its largest one-day percentage gain since March 3, and Michael Lewis, head of commodity research at Deutsche Bank said that he expects the latest events in Iraq "will sustain strong fundamentals" for Brent crude.

Shares in companies like Royal Dutch Shell PLC and Total SA rose on the back of those moves too, with the former representing the largest gainer in the pan-European index by midmorning.

More broadly though, the escalating situation in the Middle East appeared to unnerve equity investors, with the Stoxx 600 Europe down 0.4%. Germany's DAX and the U.K.'sFTSE 100 both lost 0.7% while France's CAC-40 declined 0.6%. In the U.S., the S&P 500 was indicated opening broadly unchanged on the day. Changes in futures, however, aren't always reflected in market moves after the opening bell.

Friday was a relatively quiet day in terms of economic data. Out of the U.K., figures showed that construction output rose in April for the first time in three months, boosted by new housing work and repairs. Elsewhere, figures showed that the euro zone's trade surplus widened in April compared with the same month a year earlier as imports fell more rapidly than exports.

Figures released by the European Union's statistics agency also showed that as tensions between the 28-nation bloc and Russia rose in the wake of the latter's March takeover of Ukraine's Crimea peninsula, trade flows continued to fall rapidly.

Write to Josie Cox at

  (END) Dow Jones Newswires
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This article appears in: Energy , US Markets , Forex and Currencies , Economy

Referenced Stocks: FP , R6C , R6C3 , RDS , TOT

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