Sterling hits one-year high, dollar under pressure

On Monday, the pound sterling displayed impressive strength against the US dollar, with the greenback starting the week under pressure. Traders are currently speculating that the dollar might have peaked, along with US interest rates, while keeping a wary eye on looming inflation and loans data. The pound reached as high as $1.2668, which is its highest level since April 2022, before trading a touch below that level, up 0.26% on the day.

This week, the focus is on the pound ahead of an expected Bank of England rate increase on Thursday, and it has also been strengthening against the euro. The European common currency was last at 87.23 pence, having dipped to 87.11 pence on Friday, which is its softest level against the British currency this year.

Goldman Sachs revised their three-month forecast for the euro to 86 pence on Friday, and stated that the same factors that acted as headwinds on Sterling in 2022 have turned to tailwinds. Against the dollar, however, the euro has rallied nearly 16% from September lows, and was up 0.29% to $1.10505. This is supported by expectations that the European Central Bank will keep interest rates high for longer than the US Federal Reserve.

Last week, the Fed raised rates by 25 basis points, but sounded slightly more cautious than peers on the outlook, dropping guidance about the need for future hikes. In spite of stronger-than-forecast US jobs data released on Friday, U.S. interest rate futures are pricing about a one-third chance of a rate cut as soon as July, according to the CME FedWatch tool.

The ECB last week also slowed the pace of its interest rate increases but signalled more tightening to come. This development was noted by Carol Kong, currency strategist at Commonwealth Bank of Australia, who stated that “Interest rate differentials between the Eurozone and US continue to narrow, removing a headwind for (the euro vs the dollar). We expect EUR/USD to remain supported while financial markets continue to price interest rate cuts for the US this year and further interest rate hikes from the ECB.”

The dollar index, which tracks the unit against six major peers, was down 0.25% at 101.06. Last month’s 100.78 was its lowest in a year. Later on Monday, the Fed’s loan officer survey might show whether and how hard banks are tightening up on credit after three US lenders failed over recent weeks. This could weigh on the dollar if it puts downward pressure on interest rates. Traders will also be watching headlines from Capitol Hill as lawmakers attempt to negotiate an impasse over the looming US debt ceiling, with the Treasury Secretary warning the government might be unable to pay debts by June 1. US inflation data is due on Wednesday.