Sterling rose to its highest level in almost a year, as the dollar was broadly softer against other major currencies on Friday.
The pound continues to recover, while the banking sector woes added to talk of U.S. rate cuts later this year, ahead of the much-anticipated monthly U.S. jobs report just after midday (GMT).
The dollar index, which measures the greenback’s value against other major currencies, was down around 0.15 per cent at 101.23 and set for a second straight week of falls.
Commenting on the Pound Sterling’s continued rise, Susannah Streeter, head of Money and Markets at Hargreaves Lansdown said: ‘’The UK economy may be stagnating, but with a recession set to be swerved for now and the Bank of England set to raise rates again to bring stubborn inflation under control, it’s given more solidity to sterling.
“At the same time, the mighty dollar has weakened as financial markets price in cuts to rates in the US by the end of the year.
“Worries about the implications of the banking crisis are playing into this, with expectations that it’ll mean banks will tighten lending acting as an extra drag on the economy just as the lag effect of rapid rate rises take effect.’’
Growing expectations for a Federal Reserve rate cut later this year has dimmed the outlook for the dollar, while fresh turmoil among U.S. banks has ratcheted up recession risks and added to speculation that the Fed will soon reverse course.
The central bank hiked rates by a quarter point on Wednesday and signalled it may pause an aggressive tightening campaign.
“Conviction levels are rising that credit conditions will tighten and the U.S. economy would slow more than it otherwise would,” said Chris Turner, global head of markets at ING.
“That takes the heat out of inflation and paves the way for the Fed to cut rates.”
Traders have priced in more aggressive rate cuts from the Fed, with Fed funds futures implying a small chance that cuts could come as soon as July .
Meanwhile, the euro recovered ground from losses made after Thursday’s European Central Bank meeting and the yen was set for its first weekly gain in nearly a month as it benefited from safe-haven demand.
The April non-farm payrolls report later on Friday could provide the next steer for currency markets. Economists polled by Reuters forecast the U.S. economy created 180,000 new jobs, versus 236,000 in March.
Sterling climbed over a third of a percent to $1.2633, reaching its highest level in almost a year. It was around 0.2 per cent firmer at 87.46 pence per euro.
And the euro was up around 0.2 per cent at $1.1036, but held below recent one-year peaks. It came under selling pressure on Thursday after ECB on Thursday slowed the pace of its interest rate increases with a 25-basis-point rise and noted that past moves were having an impact on the economy.
Although ECB President Christine Lagarde signalled more tightening to come, markets pared back their expectations on how much further rates would rise.
“Lagarde was hawkish in her press conference, but I think financial markets didn’t really buy her view on further rate rises in coming months,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
Reuters – Dhara Ranasinghe, Rae Wee