LONDON (Reuters) : On Friday, sterling was on track for its greatest one-week gain versus the dollar in six months, as US interest rates seemed set to peak sooner than UK rates.
With the all-important monthly US jobs data expected later in the day, currency market action was muted.
“From a cable perspective, this release may extend the rally (NFP miss or in line with estimates) or cap upside should the report come in stronger than expected,” said IG analyst Warren Venketas.
The pound has gained 1.5% versus the dollar this week, the most since early December, and roughly 1.1% against the euro, the highest in nearly four months.
The major cause has been a shift of investor wealth away from the safe-haven dollar, now that legislators in Washington have enacted legislation to restrict the US government’s borrowing ceiling.
A string of hints from Federal Reserve officials this week that the central bank could hold quo when it meets on June 13-14 to discuss monetary policy has fueled that flow.
This has resulted in a substantial increase in interest-rate expectations.
Traders now expect the Fed to increase interest rates this month, down from 70% a week ago.
Meanwhile, while UK inflation stays persistently high, traders have revised their forecast for UK monetary policy.
Money markets are anticipating UK interest rates to peak at 5.32% by year’s end, up from 4.50% today.
A month ago, it was expected that UK interest rates would be about 4.80% by December.
Similarly, while US Treasury rates fell after the passage of legislation in Congress to expand the US government’s borrowing ceiling and avert a potentially disastrous default, UK yields rose, providing pound an edge – at least in principle.
This week, the premium between UK 10-year gilt rates over 10-year Treasury yields reached its highest level since early 2009.
However, considering the 50-basis-point premium that gilts have over Treasuries, sterling has not received quite as large of a boost as some would think.
In a recent report, Jordan Rochester, a strategist at Nomura, said that this is characteristic of an emerging market currency, a label frequently used to sterling due to its high volatility and susceptibility to domestic politics.
“Sticky inflation in the UK will prolong the length of the BoE rate hike cycle = lower growth, less UK inflows,” he stated.
Global growth prospects are dwindling, asset managers have a limited long position in sterling, giving them less reason to buy pounds, and the currency’s connection with bond rates is less than the dollar’s link with Treasury yields, according to Rochester. Stagflation is to blame.
Among the G7, the UK has the highest inflation and the slowest growth.
Britain escaped recession, but the impact of the cost-of-living problem on consumers and families is obvious, according to new figures on business activity, employment, and credit.