UK's pound hits its highest level since February 2020

UK's pound hits its highest level since February 2020

LONDON, Oct 15 Reuters: Sterling rose on Friday, hitting the highest since February 2020 against the euro, boosted by a combination of dollar weakness and expectations that the Bank of England will raise rates this year.

The dollar was heading towards a weekly contraction and the Japanese yen rebounded from a three-year low as global risk appetite sunk.

At 1139 GMT, the pound was up 0.6% against the dollar at $1.3756, having hit its highest since May 2021 and on track for its biggest weekly gain since a month in a row.

It was up around 0.5% against the euro, having touched its highest level since February 2020 at 84.355 pence per Euro Against the yen, the pound rose to its highest level since 2016 Simon Harvey, senior FX analyst for Monex Europe, said that sterling's move was prompted by dollar weakness and investors covering their dollar short positions.

Expectations that the Bank of England will raise rates in 2016 have also been cited as a factor supporting the pound by some analysts.

The pound overcame the dollar on Monday after BoE Governor Michael Saunders indicated 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 two other policymakers made more solid remarks on Thursday : Catherine Mann and Silvana Tenreyro, pushing back against the idea of raising rates.

ING FX strategists said that the dovish comments did not significantly affect the market expectations for a rate rise.

Looking beyond today's monetary 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 in the face of new frictions between the UK and the European Union in Brexit.

Prime Minister Boris Johnson signed up to the Northern Ireland protocol as part of his Brexit in 2020 agreement but has since argued it was agreed in haste and was no longer working for the people of Northern Ireland.

On Wednesday, the EU offered Britain a package of measures to ease the transit of goods with the province, but British Brexit Minister David Frost said that the proposals were not enough.

This EU proposal appears to have fuelled imminent selling of the pound in the markets, as defined by Executive Director Derek Halpenny in a client note.

We doubt the pound will get much lift from this latest Brexit issue until there is progress in the negotiations over the coming weeks.