Sterling noses higher thanks to flourishing business activity

The pound rose on Friday, boosted by data that showed business activity expanded at its fastest pace in eight months in February, which added to the view among investors that UK rates will continue to rise beyond March. The final version of the S&P Global/CIPS UK services Purchasing Managers’ Index (PMI) increased to 53.5 last month, up from 48.7 in January, the strongest rate of growth since June last year. Any reading above 50 represents an expansion.

S&P Global said the recovery in business activity in the services sector, which grew for the first time since August, was partly linked to expectations of interest rates peaking. Sterling rose 0.4% against the dollar to $1.199 and gained 0.3% versus the euro to trade at 88.45 pence. The pound has risen by almost 1% this week, supported by a shift up in expectations for UK rates, and in part by Britain reaching an agreement with the European Union on post-Brexit trading rules for Northern Ireland.

Financial markets expect the Bank of England’s main rate to top out at 4.75% in August, up from 4.0% now and up from expectations for a peak around 4.0% a month ago. BoE chief economist Huw Pill on Thursday said Britain’s economy is showing slightly more momentum than expected and pay growth is proving a bit faster than the central bank forecast last month, helping underpin expectations that UK rates won’t peak quite yet. “Yesterday Bank of England chief economist Huw Pill said that inflation risks in the UK economy continue to remain tilted to the upside, and supported the idea that rates are likely to have to continue to rise,” CMC Markets chief strategist Michael Hewson said. “His tone was in contrast to Governor Andrew Bailey the day before who would have markets believe that the probability of another rate hike in a couple of weeks’ time should not be taken for granted,” he added.

DOLLAR HEADS FOR FIRST WEEKLY LOSS IN FIVE, CRYPTO FALLS

The US dollar eased from a 2-1/2-month high versus the yen on Friday and looked set for its first weekly loss since January against major peers as traders tried to gauge the path for Federal Reserve policy.The yen, though, which is particularly sensitive to US-Japanese long-term interest rate differentials, threatened to extend its recent losing streak to seven weeks, even as it gained strength on Friday with 10-year US yields retreating from a nearly four-month high close to 4.1%.

Cryptocurrencies took a beating as the crisis engulfing Silvergate worsened, with industry heavyweights including Coinbase Global and Galaxy Digital dropping the lender as their banking partner.The dollar index, which measures the currency against the yen, euro and four other major peers, eased 0.24% to 104.71, from as high as 105.36 at the start of the week, which was its strongest level since Jan. 6. Since last Friday, the index has slipped 0.5%. Taking some steam out of the dollar and the breathless advance in US yields were comments from Fed policymakers, including Atlanta Fed President Raphael Bostic who said that “slow and steady is going to be the appropriate course of action,” despite new labour figures adding to the run of strong data of late. “Yesterday’s Fed speakers – Collins, Waller and Bostic all seemed content with 25bp hikes for now,” said Mizuho senior economist Colin Asher in a note.

“Most noted a possible need to push rates higher if the data continue to come in hot – suggesting data dependence,” Asher added.Analysts polled by Reuters said recent dollar strength is temporary, and the currency will weaken over the course of the year amid an improving global economy and expectations the Fed will stop hiking interest rates well ahead of the European Central Bank. “A lot of the dollar strength seen in February has probably run its course now,” said Michael Brown, market analyst at TraderX.

DOLLAR FIRMS AFTER U.S. LABOR DATA SUGGESTS MORE RATE HIKES

The U.S. dollar eased from a 2-1/2-month high versus the yen on Friday and looked set for its first weekly loss against major peers since January as traders tried to gauge the path for Federal Reserve policy. The yen, which is particularly sensitive to U.S.-Japanese long-term interest rate differentials, looked set to halt its six-week losing streak as it gained strength on Friday with 10-year U.S. yields retreating from a nearly four-month high close to 4.1%. Cryptocurrencies took a beating as the crisis engulfing Silvergate worsened, with industry heavyweights including Coinbase Global and Galaxy Digital dropping the lender as their banking partner. The dollar index, which measures the currency against the yen, euro and four other major peers, eased 0.25% to 104.7, from as high as 105.36 at the start of the week, which was its strongest level since Jan. 6. Since last Friday, the index has slipped 0.5%.

Taking some steam out of the dollar and the breathless advance in U.S. yields were comments from Fed policymakers, including Atlanta Fed President Raphael Bostic, who said that “slow and steady is going to be the appropriate course of action,” despite new labour figures adding to the run of strong data of late. “Yesterday’s Fed speakers – Collins, Waller and Bostic all seemed content with 25bp hikes for now,” said Mizuho senior economist Colin Asher in a note. “Most noted a possible need to push rates higher if the data continue to come in hot – suggesting data dependence,” Asher added.

Analysts polled by Reuters said recent dollar strength was temporary, and the currency will weaken over the course of the year amid an improving global economy and expectations the Fed will stop hiking interest rates well ahead of the European Central Bank. “A lot of the dollar strength seen in February has probably run its course now,” said Michael Brown, market analyst at TraderX. “I wouldn’t be surprised to see some consolidation until (Fed Chair) Powell speaks next week and the jobs report on Friday, with the bar for significant further gains in the dollar quite high at this point,” Brown added.

STERLING FALLS AS INTEREST RATE OUTLOOK AND STRONG DOLLAR WEIGH

The pound dipped on Thursday as the dollar rallied and speculation grew that the Bank of England may not hike interest rates any further. Sterling was last down 0.45% against the dollar at $1.197. Meanwhile the euro was up 0.05% against the pound at 88.72 pence.

Analysts said the dollar and British interest rate outlook were driving the pound. Bank of England Governor Andrew Bailey on Wednesday raised the prospect that the central bank might not need to raise interest rates again, after hiking them to 4% from just 0.1% in December 2021. Bailey said “some further increase” in rates may turn out to be appropriate, “but nothing is decided”. “Bailey’s more dovish talk yesterday, it’s definitely taken some of the wind out of the sails of sterling,” said Ben Laidler, global markets strategist at trading platform eToro. Expectations for lower interest rates tend to weigh on a currency, by making investments in a country look less attractive than those elsewhere. Laidler said hopes of a pause received a boost from a BoE survey on Thursday, which showed British business scaled back their plans to increase prices over the coming year in February.

Simon Harvey, head of FX strategy at currency firm Monex Europe, said the data “suggests that inflation expectations are moderating”. “Although firms are still facing hiring difficulties… they are less willing to overpay for the marginal worker than in previous months,” he added.

Meanwhile, the dollar index, which measures the U.S. currency against six major peers, was last up 0.4% to 104.8. The dollar was boosted on Thursday by comments from a senior Federal Reserve official suggesting that a 50 basis point rate hike later this month is a possibility. It comes after the dollar climbed 2.8% in February on the back of strong economic data.Pound traders shrugged off the biggest economic data release of the day, with sterling showing little reaction to a rise in year-on-year euro zone core inflation – which strips out volatile energy and food prices – to a record high of 5.6% in February. Headline inflation cooled, but not by as much as expected.

DOLLAR FIRMS AFTER US LABOR DATA SUGGESTS MORE RATE HIKES

The dollar strengthened on Thursday after unemployment claims pointed to a still strong U.S. jobs market and other data showed growing labor costs, indicating the Federal Reserve has further to go in raising interest rates to tame inflation.

The yield on two-year Treasury notes, which are sensitive to interest rate expectations, shot to levels last seen in July 2007 as the market perceives the Fed will raise rates further to curb rising consumer prices. “This move higher that you’re seeing in U.S. rates is not happening in isolation,” said Alvise Marino, macro trading strategist at Credit Suisse in New York. “Similar developments are happening in the rest of the world, in particular in Europe, mostly notably, where the inflation data keeps on surprising relatively strong,” he said.

Atlanta Fed President Raphael Bostic said on Thursday that the U.S. central bank was ready to keep lifting rates higher if inflation doesn’t slow and was still mulling how recent, stronger-than-anticipated inflation data might shape Fed policy. The impact of higher rates on the economy may only begin to “bite” in earnest this spring, an argument for the Fed to stick with “steady” quarter-point rate increases, Bostic said. “There’s more and more of a concern that incoming data is revealing that the Fed might be a little bit behind the curve than maybe they expected heading into this year,” said Bipan Rai, North America head of FX strategy at CIBC Capital Markets in Toronto.Futures edged higher, with the market pricing a peak rate climbing to 5.493 per cent in the fed funds by September, before easing a bit later in the session to 5.447 per cent.

The number of Americans filing new claims for unemployment fell again last week, pointing to a still strong jobs market. Another Labor Department report showed labor costs grew much faster than previously estimated in the fourth quarter. The euro slid on data that showed inflation in the euro zone was not as high as investors had feared but remains elevated. Inflation eased to 8.5 per cent from 8.6 per cent in January on lower energy prices.