Sterling hits 10-month high as recession fears ease while dollar is under pressure
The British pound rose to a new 10-month high against the dollar on Tuesday, and the euro reached its highest in two months, as the U.S. currency continued to suffer from market bets that the end of the U.S. rate-hiking cycle is near.
Sterling rose 0.84 per cent to $1.2521, its highest since June 2022, after breaching a significant resistance level.
“$1.2448 has been a huge technical chart resistance. It has been a high twice this year,” said Joe Tuckey, head of FX analysis at Argentex.
“Breaking through this means it is an initiation point for fresh sterling buyers, a short covering area for sterling shorts.”
The dollar also weakened against most other European currencies and the euro reached $1.0938, its most since early February, and was last up 0.14 per cent at $1.0918.
“We’ve been saying that FX hasn’t really captured what’s been happening in rates, and there is scope still for the dollar to weaken a bit further,” said Derek Halpenny, head of research for global markets at MUFG.
“Short-term spreads between core Europe and the U.S. are more consistent with euro-dollar trading near $1.10 to $1.15.”
U.S. and European government bond yields fell dramatically last month as investors rushed to buy safe-haven assets due to fears about the banking sector, and while they have rebounded a little they remain well below recent highs.
The German two-year yield has dropped 70 basis points since its March highs and was last at 2.687 per cent, but U.S. moves have been even more dramatic.
The U.S. two-year yield was last at 3.9978 per cent, down a full percentage point from its early March highs, after the banking turmoil caused traders to reassess expectations that there were still several Federal Reserve rate hikes ahead.
Market pricing presented by CME’s Fedwatch tool indicates around a 45 per cent chance Fed rates are at their current level – 4.75-5.0 per cent – by July, in three rate-setting meetings time, with a 15 per cent chance they’re at 4.5-4.75 per cent, and a 35 per cent chance they are at 5.0-5.25 per cent.
The latest data to support a slowing in rate increases was from a Monday survey by the Institute for Supply Management (ISM) that showed that manufacturing activity fell to the lowest in nearly three years in March as new orders continued to contract, with all sub-components of its manufacturing PMI below the 50 threshold for the first time since 2009.
Traders still think the European Central Bank has more rate hikes to come however.
In a further sign that the end of global rate hikes is approaching, the Reserve Bank of Australia (RBA), as expected, left its cash rate unchanged at 3.6 per cent, breaking a run of 10 straight hikes as policymakers said additional time was needed to “assess the impact of the increase in interest rates to date and the economic outlook”.
The Australian dollar was last down 0.5 per cent at $0.6751 .
“(The RBA) seem content that inflation has peaked and opted to not pull the hiking trigger ahead of the quarterly inflation report in a few weeks,” said Matt Simpson, senior market analyst at City Index.
“Unless the RBA are presented with a surprise uptick on the quarterly inflation print, I think the RBA will be happy to sit with 3.6 per cent for the next two to three months.”
Elsewhere, the dollar rose 0.4 per cent against the Japanese yen to 133 , and the U.S. dollar index, which tracks the unit against a basket of currencies was steady at 102.01.
Reuters – Alun John