The pound rose 0.1% against the dollar to $1.2359, its highest since Feb. 2. The euro rose 0.1% against sterling to 87.91 pence.
The pound's risk-sensitive nature means it was "supported by the rebound in risk appetite amidst cooling concerns about the banking sector turmoil", according to George Vessey, FX and macro strategist at Convera.
Markets have been volatile in March following the collapse of U.S. tech lender Silicon Valley Bank (SVB) and the emergency takeover of Credit Suisse by banking rival UBS, raising fears of systemic stress that could lead to more bank failures.
But relief swept over markets this week after regional U.S. lender First Citizens BancShares bought the assets of SVB and the absence of fresh concerns helped lift confidence among investors.
"Sterling is quite sensitive to risk-on, risk-off moves," said Joe Tuckey, head of FX analysis at Argentex. "Things are looking finely balanced and if there's another leg down in U.S. equities you could see safe haven flows into the dollar and a leg back down in cable (GBP/USD)," he added.
Bank of England (BoE) Governor Andrew Bailey said on Tuesday the central bank was on alert amid global turmoil in the banking sector, but added Britain was not experiencing stress linked to the problems at SVB and Credit Suisse. "Bailey was suggesting that these have been a couple of idiosyncratic, bank specific issues," Argentex's Tuckey said. "The market is of the sense at the moment that this isn't going to be some sort of pervasive, systemic banking crisis." The BoE raised interest rates by 25 basis points last week, the 11th increase of the current tightening cycle, but markets expect the central bank is close to calling time on rate hikes.
Traders price in around 14 basis points of tightening at the BoE's May meeting, implying around a 60% chance of a 25 basis point hike. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic: World FX rates in 2023 Graphic: Trade-weighted sterling since Brexit vote ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Samuel Indyk Editing by Mark Potter)
