Sterling rallied against the dollar on Friday, lifted by brighter sentiment in European stock markets as investors lowered their guard towards riskier assets. The pound also advanced against the euro, but was held fairly close to recent six week lows, with the single currency benefiting from the Swiss central banks decision the previous day to weaken its currency.
European stock markets gained ground for a fourth consecutive session on Friday, with financials leading the way as confidence grew that some large US banks - including Citigroup - might be able to survive without nationalisation. "There seems to be a slightly more positive feel to the market today, with people trying to digest the moves of this week and Switzerlands moves into the FX market yesterday," said Paul Robson, currency strategist at RBS in London.
"Theres also a habit of reversing trends ahead of the weekend, just in case there is more bad news as it has tended to come with increasing regularity," he added. By 1500 GMT, sterling was up half a percent on the day at $1.4005, after hitting a six-week low earlier this week at $1.3653. The euro was down 0.4 percent at 92.18 pence, but still near Thursdays six-week high of 93.20 according to Reuters data.
The FTSEurofirst 300 index of leading European shares was up 1.25 percent on the day. The single currency hit a two-month high against the Swiss franc after seeing its biggest ever one-day gain on Thursday after the SNB combined FX intervention with a rate cut as part of a confluence of measures to stave off deflation.
Also on Thursday, the Bank of England pressed on with a quantitative easing campaign aimed at boosting money supply to stimulate lending. It detailed plans to purchase 5 billion sterling of UK gilts next week as part of a programme to buy 75 billion in coming months.
"Quantitative easing is having an impact on longer-term yields...that is having an impact on sterling which has always been yield-sensitive," said Simon Derrick, head of FX research at Bank of New York Mellon. "The euro/sterling story remains absolutely in place," he added.
Markets will be keeping an eye on policymakers later on Friday as a meeting of the Group of 20 leading industrialised nations starts. Finance ministers and central bankers are gathering to lay the groundwork for a leaders summit in early April, aimed at co-ordinating to fight the global financial downturn.
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