Sterling rallied to a near 13-month high against a weak dollar on Friday after UK borrowing data was less bad than feared, and talk Spain may soon request aid fuelled demand for perceived riskier currencies. The pound rose 0.5 percent to $1.6310, rising past reported option barriers at $1.6300 to hit is highest level since late August 2011, before paring some of those gains to trade at $1.6270.
The rise, nevertheless, pushed its trade-weighted index to a two-week high of 84.5, data from the Bank of England showed. UK public sector borrowing numbers for August were slightly better than expected with net borrowing excluding financial sector interventions at 14.410 billion pounds. Economists had forecast 15 billion. "These numbers have helped the pound against the dollar as has the speculation that Spain will soon seek a bailout," said Phillip Hoey, senior account manager at Caxton FX. "It is euro strength that is driving currencies as can be seen in the euro/sterling cross." The common currency was steady on the day, trading at 80 pence and recovering from a session low of 79.785. The euro recovered broadly on Friday on speculation Spain may move to seek financial aid soon.
Despite the slightly better-than-expected borrowing numbers in the UK, the deficit was still the highest on record for any August and analysts said the country remained off course in meeting finance minister George Osborne's deficit-reduction targets. That kept alive the risk of a sovereign downgrade by credit rating agencies. The weak fiscal situation will also keep pressure on the Bank of England to ease monetary policy further to support growth. Governor Mervyn King gave a downbeat assessment of the British and world economies on Thursday and warned the euro zone could yet fall apart. King also said it could be "acceptable" for the government to miss its goal of reducing Britain's debt-to-GDP ratio by 2015.
Recent UK data, including evidence of falling unemployment and a strong rise in industrial production, has suggested the economy may be picking up. But BoE minutes on Wednesday showed some policymakers felt the economy may need more stimulus, suggesting the central bank may extend its 375 billion pound asset buying scheme.
Any easing by the BoE, though, is unlikely to happen until November and that is likely to support sterling against the dollar in the near term. The US currency has come under immense pressure after the Federal Reserve unleashed a fresh bout of aggressive monetary easing ING recommended clients to buy sterling, targeting a rise to $1.6600 with stop-losses at $1.6150. The bank said sterling could get a boost from the Fed's easing policy with reserve managers likely to diversify out of the dollar into pounds. Sterling could get a lift next week from farm subsidy payments that the EU makes to the UK. ING estimates 3 billion euros of payments are likely to flow into the UK on September 28.