Sterling inched higher in trade-weighted terms on Monday after a volatile week that saw it soar to its highest in more than six years against the basket of currencies measuring its broader strength. For all the pound's weakness against the dollar over the past six months, it has gained steadily against the European currencies in which it does most of its trade. The past month has also seen it bounce 3 percent higher against China's yuan.
That all seems broadly the product of a steadying of expectations, after they were pushed back by more than a year, for the Bank of England to deliver a rise in interest rates early in 2016. That, and the resulting higher yields of UK government bonds, links sterling to the dollar as one only a handful of major currencies able to offer investors some easy return on their money.
"We have for quite some time argued that the GBP potential is underestimated in financial markets," analysts from Danske Bank said, pointing to a dip in bets for more sterling weakness in the most recent data on market positioning. Sterling was 0.4 percent higher against the euro at 73.58 pence and 0.2 percent lower at $1.5370. It has gained strongly since an employment report in the middle of last week showed wage growth surging ahead of inflation.
Markets have already been overwhelmingly wrong about UK rates in the past year: less than a year ago the consensus was for a first rate hike in November of 2014. A research report on Monday from a UK online retail stockbroker, Share Centre, calculated that the strength of the pound had knocked $2.7 billion off the sales of British companies reporting annual results in the fourth quarter.
But with all of the major banks still calling for more losses for the euro, the pound looks to many like a good bet to follow the dollar higher this week if testimony by Federal Reserve chief Janet Yellen affirms expectations of a US rate rise in the middle of this year.
"The dollar is range-struck against the yen but a hawkish Yellen testimony would take it higher and sterling against the yen is a decent way to trade this, buying at 183.40 with a stop at 181.50 and a target of 190," Societe Generale strategist Kit Juckes said. The pound traded at 183.26 yen, steady on the day.
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