(Refiles story from Friday, May 5, to correct spelling of
broker Argentex in paragraph 6)
By Harry Robertson
LONDON, May 5 (Reuters) - The pound rose to just shy of
a one-year high against the dollar on Friday, and to a one-month
high against the euro, as traders eyed the Bank of England's
interest rate decision next week.
Sterling was up 0.21% at $1.26 on Friday, after
reaching $1.263 earlier in the session, the highest since late
May last year.
The euro was down 0.14% against the pound at
87.49 pence, after earlier falling to 87.42 pence, the lowest
since April 6.
The pound has received a boost from the U.S. Federal Reserve
meeting this week, analysts said, when the central bank raised
rates by 25 basis points but signalled that it may stop there.
U.S. employment data, out at 1230 GMT on Friday, will provide
clues as to the Fed's likely next move.
By contrast, many analysts think the Bank of England will
have to keep raising rates, given that inflation is much
stronger in Britain - running at 10.1% year-on-year in March,
compared with 5% in the United States.
"The Fed dropping some of the hawkish language from its
statement this week allowed markets to solidify their view that
this is the end of the hiking cycle in the U.S.," said Joe
Tuckey, head of FX analysis at broker Argentex. "Sterling has
been able to capitalise on this."
When interest rates look like they're going to rise in one
country but stay flat in another, it can make investments in the
former country look more attractive, potentially boosting the
currency.
A stronger-than-expected, although still lacklustre, economy
has also supported the pound. Economists have been on recession
watch, but one is yet to materialise, in part because of a drop
in energy prices.
Meanwhile, a rapid slowdown in U.S. inflation and the Fed
approaching the end of its hiking cycle has sent the dollar down
against a range of currencies.
The dollar index , which measures the U.S. currency
against its major peers, was down slightly on Friday and was
0.34% lower for the week.
Sterling's perkiness against the euro can also partly be
explained by the outlook for central banks, said Chris Turner,
global head of markets at ING.
The European Central Bank on Thursday raised rates by 25
bps, a step down in the pace of monetary tightening. Euro zone
inflation has also cooled quicker than Britain's.
"Sterling is doing better. Part of that owes to the ECB,
which was less hawkish than expected and that took some of the
steam of the euro," Turner said.
Traders broadly expect the Bank of England to raise rates by
25 basis points to 4.5% on Thursday next week, according to
pricing in derivatives markets.
They then see rates climbing to a peak of around 4.8% later
in the year.
Dominic Bunning, head of European FX research at HSBC, said
the pound could rise to around $1.30 later in the year.
"This is not a story of an absolute positivity," he said.
"We're not looking for much, much bigger gains here."
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Graphic: World FX rates in 2020 Graphic: Trade-weighted sterling since Brexit vote Sterling vs dollar ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting by Harry Robertson, additional reporting by Dhara
Ranasinghe. Editing by Jane Merriman)
