Sterling Rally Takes Shine Off Dollar's Best Week Since February

  • Pound nears $1.36 as BOE’s biggest dove says hike may be due
  • Volatilities show market is less sensitive to Korea headlines

A dollar gauge slipped on Friday yet was set for its best weekly run in seven months, while the pound surged to levels unseen since the Brexit vote on hawkish policy maker comments.

The Bloomberg Dollar Spot Index stood 0.6 percent higher on a weekly basis as a stronger-than-estimated inflation reading on Thursday now has a Federal Reserve hike by year-end as a coin toss. Upbeat U.S. data of late before a Fed meeting next week has prompted investors to take some medium-term short-dollar positions off the table. 

Real money and macro accounts sitting on shorts were seen trimming exposure earlier this week, according to traders in Europe and London. Short-term names took profit on their longs after the gauge hit a fresh one-week high on Thursday. While some negativity is slowly priced out of the greenback, most investors still treat rallies as opportunities to fade, said the traders, who asked not to be identified as they weren’t authorized to speak publicly.

Sterling led Friday’s gains against the greenback, rising above $1.36 for the first time since the U.K. voted to exit the European Union. The Bank of England’s Gertjan Vlieghe, seen as the most dovish voter on its monetary policy committee, said that a rate hike may be needed in coming months.

The yen led losses among Group-of-10 currency peers as news that North Korea launched another missile over Japan didn’t have a lasting effect. Dollar-yen not only reversed a 0.6 percent drop but rose as much as 1 percent to 111.33, the highest level since July 28.

  • Driven by higher Treasury yields, BBDXY pared losses and stood 0.2% lower on the day as of 11:30 a.m. London
    • Stops in USD/JPY hit above 111.00 with more seen above 111.50: traders
  • Stop entries in sterling above 1.3500 and 1.3550 drove cable higher, as barrier-protection at the latter level proved inadequate to absorb leveraged demand
    • One-month risk reversals rose to 33bps, the most bullish sentiment for the pound since 2009
    • Two-month riskies, which capture an EU summit in October, rose above par for the first time in eight years
  • In another sign that the currency market is less sensitive to tension over the Korean peninsula, one-week implied volatilities rose by less than half compared to Korea’s latest missile launch on Aug. 29
  • The euro rose a second day and hit a day high at 1.1956; support at 21-DMA, currently at 1.1901, seems to provide a basis for bulls
    • ECB’s Lautenschlaeger said now is the time to take decision on scaling back QE, boosting the euro
    • Expiries Friday include 1.1900 (EU1.88b), 1.1925 (EU418m), 1.2000 (EU2.17b): DTCC
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