Pound Caught in a Policy Tug-of-War in Day of Gains and Losses

  • Erases drop versus dollar on less-than-hawish Fed speakers
  • Sterling touches weakest level in almost 3 months against euro

For an illustration of the power of central bankers to influence the course of currency markets, just take a look at the back-and-forth in the pound on Thursday.

Britain’s currency fell against the dollar earlier amid speculation a string of scheduled speeches by Federal Reserve officials would firm the ground for a U.S. interest-rate increase in December. They ended up not following the script most investors were expecting, instead urging caution about tightening Fed policy -- and the pound wiped out its decline.

By the end of the European trading day, sterling was little changed versus the greenback, up less than 0.1 percent at $1.5220 as of 5:30 p.m. London time. It was 0.5 percent weaker at 70.96 pence per euro after jumping to an almost three-month high after European Central Bank President Mario Draghi reaffirmed his commitment to ramp up stimulus where necessary.

The pound is caught “between the ECB and euro on one side and potentially what the Fed might do on the other,” said Stuart Bennett, London-based head of Group-of-10 currency strategy at Banco Santander SA.

Inconveniently Cautious

U.K. government bonds rose, with the benchmark 10-year yield falling four basis points, or 0.04 percentage point, to 2.01 percent. It reached 2.09 percent on Nov. 9, the highest since July. The 2 percent gilt due in September 2025 climbed 0.38, or 3.80 pounds per 1,000-pound face amount, to 99.925.

Fed policy maker Jeffery Lacker stressed the need for a cautious approach to monetary policy when speaking in Washington, while his colleague Charles Evans said the central bank must be clear that any rate increases will be gradual. Fed Bank of St. Louis President James Bullard struck a more hawkish tone, saying that near-zero borrowing costs are no longer needed as the world’s largest economy improves.

“The market has gone well beyond itself in an excessive hope to catch any hawkish hint” from the Fed speakers, said Ipek Ozkardeskaya, a market analyst at London Capital Group. The lack of such comments “is weighing on the U.S. dollar,” though any benefit to the pound will be “short-lived.”

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