LONDON, Oct 15 Reuters - Sterling rose to a three-week high in early trading on Friday and was on track to have its best week in USD against the dollar since August, which was boosted by rising expectations that the Bank of England will raise rates this year.
Many investors are betting that the BoE will become the first major central bank to increase interest rates since the start of the coronavirus pandemic.
The market is pricing in a 72.4% possibility of rate hike at the June 2021 BoE meeting, according to CME data, up from a 45.6% chance a week ago.
The pound has also been helped over the past three days by dollar weakness.
At 0812 GMT, sterling was up 0.5% against the dollar at $1.3735, having earlier in the session risen to as high as $1.3739 - its strongest since Sept. 23. It has been on the course for its biggest weekly increase since the last week of August.
With respect to the euro, it was up around 0.3% and 87.61 pence per euro was got.
The pound against the dollar was spiked on Monday after BoE Governor Michael Saunders stressed the need to prevent inflation from becoming permanently embedded and fellow policymaker Andrew Bailey said households must brace for significantly earlier interest rate rises.
But on Thursday two more dovish policymakers - Catherine Mann and Silvana Tenreyro - made more favorable remarks, pushing back against the idea of raising rates.
ING FX strategists said that the dovish comments did not significantly affect the market's expectations for a rate rise.
Looking beyond today's price action, we still think sterling may have to give up some of its recent gains as our economist expects the BoE to underdeliver on monetary tightening, ING said in a client note.
ING also said that the pound was complacent to new Brexit-related frictions between the UK and the European Union.
Boris Johnson signed the Northern Ireland protocol as part of his Brexit plan in 2020, but has argued that it was agreed in haste and had no longer worked for people in Northern Ireland.
On Wednesday, the EU offered a package of measures to ease the transit of goods to the province, but David Frost, the Brexit Minister, said that the proposals were not enough.
This EU proposal appears to have removed the prospect of an escalation that could have fuelled imminent selling of the pound in the markets, wrote MUFG head of research Derek Halpenny in a client note.
We doubt the pound will get much lift from this latest Brexit issue until there is a sense of progress in the negotiations over the coming weeks.