The Great British Pound Seems To Be Great Once Again

The biggest forex surprise has been the recovery of the Great British Pound, which continued to gain 30 points this morning to trade at 1.6172 and could break the 1.62 level before the month closes. The pound has been rallying ever since data over the past month has shown that “austerity” paid off. Bets on further sterling strength are mounting as some in the financial markets consider the possibility that the Bank of England may be the first of the world’s major central banks to raise interest rates. The BoE shows no sign of standing in the way of such bets with policymakers seeming less concerned than in recent months about the impact of a stronger pound. Upbeat UK economic data has fueled speculation the BoE might hike rates sooner than suggested by Governor Mark Carney’s forward guidance. 

By contrast, the European Central Bank is seen more likely to cut rates than raise them. And with the Federal Reserve having shocked markets last week by leaving the pace of its money-printing stimulus unchanged, some analysts say the BoE could even tighten policy before the US central bank.  All this will push sterling even higher, analysts say. While that would have bothered the central bank a few months ago, recent comments from BoE policymakers indicate a more tolerant attitude towards the pound’s recent rise. The biggest contrast in expectations is between BoE policy and that of the European Central Bank, giving the pound even more scope to rise against the euro than versus the dollar.  Last week comments from Mario Draghi helped push the euro to trade at 1.3250. The euro is easing this morning to exchange at 1.35 as the month draws to a close. The euro/pound is trading at 0.8350 down by 28 points.

US political dramatics have helped the euro and other crosses to trade on a positive note as politicians do what they do best. With a possible government shutdown looming if democrats and republicans cannot agree on terms for a new budget. The dollar fell in the longest stretch since June as traders weighed whether the economy is strong enough to warrant a reduction in monetary stimulus and as political budget wrangling threatened a government shutdown.

The yen rallied the most against the dollar of its 16 major peers as comments from Finance Minister Taro Aso damped bets the government will cut corporate taxes. A basket of emerging-market currencies fell. The Labor Department may report on October 4 that private payrolls increased by 180,000 this month. Investors are assessing those figures after the Federal Reserve surprised the markets on September 18 by maintaining its $85 billion in monthly bond purchases. Strong data in Japan this morning helped the JPY to climb to trade at 97.86 against the greenback. The AUD and the NZD are in the red after Chinese HSBC PMI data missed expectations weighing heavily its trading partners.