Sterling surged to a three-month high against the dollar this week as traders increased bets on a near-term rise in UK interest rates.
Expectations that the Bank of England would abandon its ultra-loose monetary policy stance in an effort to stem inflationary pressures in the British economy were heightened as surveys revealed a sharp rebound in activity in the UK manufacturing, services and construction sectors in January.
These forecast-beating data fed the notion that the shock contraction in the UK economy in the fourth quarter was a one-off and dispelled some fears over stagflation in Britain’s economy.
Interest rate markets moved to price in a 75 per cent chance that the Bank would raise rates in May, up from just 30 per cent at the start of the year.
Tim Davis at Morgan Stanley said he maintained his bullish stance on the pound and that the near-term performance of sterling depended largely on when the Bank would raise rates. “Our economists still expect the first rate rise in August, but we think there could be a chance of an earlier move,” he said. “If other economic data do not disappoint, we think the hike could be moved forward to May.”
The pound reached a high of $1.6277 against the dollar on Thursday, its strongest level since November 5, before easing to stand up 1.4 per cent at $1.6080 over the week.
Sterling also climbed 1.6 per cent to £0.8443 against the euro on the week and advanced 0.9 per cent to Y131.38 against the yen.
The euro fell sharply from a three-month high against the dollar after Jean-Claude Trichet, president of the European Central Bank, tempered expectations of a near-term rise in eurozone interest rates following the ECB’s policy meeting on Thursday.
This disappointed euro bulls, who were betting that Mr Trichet would strike a more hawkish tone given that recent eurozone consumer price inflation figures had come in above the central bank’s 2 per cent target rate.
The euro, which touched a high of $1.3861 against the dollar on Wednesday, fell to stand down 0.2 per cent at $1.3581 on the week.
The dollar advanced for a third day Friday against the euro and yen in the longest stretch of gains in four weeks after the U.S. jobless rate fell to the lowest level since April 2009 even as winter storms limited gains in payrolls.
U.S. unemployment unexpectedly dropped to 9% last month from 9.4% in December, the Labor Department said today. Employers added 36,000 workers, the smallest gain in four months, after a 121,000 rise that was larger than initially reported.
Fed Chairman Ben S. Bernanke said yesterday that the U.S. needs to see faster job growth for a sufficient time before policy makers can be assured the economic recovery has taken hold.
Elsewhere, commodity-linked currencies found support as the ongoing turmoil in Egypt boosted raw materials prices.
The Australian dollar climbed 2.6 per cent to $1.0185 against the US dollar over the week, and the Canadian dollar rose 1.5 per cent to C$0.9852.
Canada’s currency touched a two-year high versus the dollar Friday as the nation’s employment rose more than four times economists’ forecasts.
Statistics Canada reported that employment rose by 69,200, compared with the median forecast of 15,000 in a survey of economists. The jobless rate rose to 7.8% from 7.6%. Full-time employment rose by 31,100 in January, and part-time jobs increased by 38,000.
The Canadian employment report restores the nation’s status as having regained all the jobs lost in the recession. A Jan. 28 revision based on updated census data reduced Statistics Canada’s estimate of total employment.
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