Sterling fell 1.39% to $1.20550, the lowest since Jan. 6 and its worst day since Dec. 15.
The surprisingly strong payrolls number reversed a move from Wednesday when traders raised bets that the U.S. central bank would stop hiking borrowing costs after a widely expected 25-basis-point increase in March. "After the Fed meeting it looked like markets had the advantage - it was still pricing in a rate cut, they took interest rates down, and they took the dollar down, and now I think 48 hours later the Fed looks like they might have the upper hand again," Chandler said.
The U.S. central bank on Wednesday raised rates by 25 basis points and said it had turned a key corner in the fight against high inflation, leading investors to price in a more dovish path going forward. Fed officials in December said they expected to raise the central bank's benchmark overnight interest rate above 5% and they have stressed they will need to hold it in restrictive territory for a period of time in order to sustainably bring down inflation. But traders had bet the rate will peak below 5% and that the Fed will cut rates in the second half of the year as the economy slows.
Traders are now pricing in the Fed's policy rate to peak at 5.03% in June, up from 4.88% on Thursday afternoon. As rate hike expectations increase, however, fears of a bigger economic downturn may also weigh on markets. "Whenever we see these big numbers, especially with the headlines, the fear of the Fed comes back with a vengeance because people are probably afraid that the Fed is going to push things even further than what they have, running the risk of not a soft landing, but more of a car crash," said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Wisconsin. The next major U.S. economic release that may give further clues to Fed policy will be consumer price data for January due on Feb. 14. (Reporting by Karen Brettell; Additional reporting by Johann M Cherian in Bangalore; Editing by Kirsten Donovan, Paul Simao and Josie Kao)
