Sterling hits 17-year high against yen as traders overlook rate divergence

By Amanda ‌Cooper

LONDON, Dec 19 (Reuters) - The pound held steady against the euro and the dollar on Friday, after ‍the Bank ‌of England delivered an expected rate cut, while hitting its highest since 2008 against the yen, hit ⁠by profit-taking following a well-telegraphed Bank of Japan rate ‌increase.

Sterling was mostly flat against the dollar at $1.3378, while the euro was marginally lower at 87.55 pence. However, the pound jumped almost 0.8% on the day against the yen to a high of 209.75, its highest since August 2008, as traders ⁠took profit on the positions they had laid on in the run-up to the BOJ's decision to lift rates. 

With the two central ​banks going the opposite ways, the gap between their interest rates is ‌now at its narrowest in four years, which ⁠would usually boost the yen at the expense of the pound. But now, traders are more concerned about Japan's longer-term finances than what the Japanese currency is yielding at the moment.

The BoE, meanwhile, cut ​rates by a quarter point, as expected, on Thursday but the narrow vote suggested not all policymakers were convinced much more easing was needed, given that inflation - the highest among the Group of Seven richest economies - remains high. Governor Andrew Bailey said the overall direction for rates was lower, but possibly at a ​slower rate.

The ‍pound, which has risen 1% this ​month so far, rose as much as 0.7% on the day after the BoE decision, only to then end Thursday's session with just a 0.1% gain.

ING strategist Chris Turner said the pound has drawn some initial support from the BoE, which proved not to lean so much in favour of more rate cuts as some had expected, with policymakers flagging wage growth and overall inflation as remaining stubbornly high. But he said sterling strength ⁠may not last long and "bears need patience."

"We suspect that these wage expectations will come down in the New Year in line with lower headline inflation. In ​all, we continue to expect 25-basis-point rate cuts in February and April, compared to market pricing of just one cut. And that should mean euro/sterling continues to find support ahead of 0.87," he said.

Markets on Friday showed traders expect at least one more rate cut by June at ‌the latest, with a roughly 50/50 chance of a second by the end of next year, which would take the base rate down to 3.25%, its lowest since late 2022.

(Reporting by Amanda Cooper; Editing by Tomasz Janowski)