The pound posted its first week of gains since mid-May against the dollar, with the U.S. currency weighed down by renewed investor uncertainty on when the Federal Reserve would tighten monetary policy.
Sterling strengthened against eight of its Group-of-10 currency counterparts in a week of fluctuations in euro-area bond markets and while Greece and its creditors struggled to strike a deal to avoid default. It pared gains on Friday after Standard & Poor’s said that Britain’s top AAA credit rating is at risk because of the government’s planned referendum on European Union membership.
“Generally within the G-10 universe, sterling is one of the better currencies,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “The reason sterling is holding up against the dollar this week is more a dollar story rather than U.K.-specific factors. There is general dollar weakness because there is so much uncertainty on the first Fed rate hike.”
Sterling rose 0.3 percent at $1.5561 as of 6:12 p.m. London time, after earlier rising 0.5 percent to $1.5598, the highest level since May 22. The currency is up 1.9 percent this week, its first weekly gain since May 15.
The pound strengthened 0.4 percent this week to 72.50 pence per euro, recovering from the 73.89 pence touched on June 9, its weakest since May 8.
Bank of England policy maker Ian McCafferty said on Friday the time to begin policy tightening is approaching as the U.K. economy is “starting to return to more normal conditions.”
“The BOE will turn increasingly hawkish,” said Stuart Bennett, head of G-10 currency strategy at Banco Santander SA in London. “If the Fed were to hike rates, the BOE wouldn’t be that far behind them,” he said, adding that he forecasts the pound to end the year at $1.59.
In a statement on Friday, S&P lowered the outlook on the country’s AAA rating to “negative” from “stable.” That means there’s a one-in-three chance of a downgrade in the next two years. It follows a warning just days ago by Moody’s Investors Service that the vote is a threat to Britain’s rating.
“It has only taken a little bit of steam out of sterling’s gains,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “With regards to the referendum sterling could start becoming sensitive to movements in the opinion polls over the longer term but we are still quite a while away from that.”
Markets are pricing in the first interest-rate increase by the BOE in August 2016, according to Sonia forward contracts. The European Central Bank has reiterated that it will maintain its expansionary monetary policy and this is a “big plus for the pound,” against the common currency, Commerzbank’s Nguyen said.
Benchmark 10-year U.K. government-bond yields fell on Friday by six basis points, or 0.06 percentage point, to 1.99 percent. The 5 percent security due in March 2025 climbed 0.58, or 5.80 pounds per 1,000-pound face amount, to 126.52.