Sterling bulls licked their wounds on Friday and fought back from a mauling that has seen the currency suffer its longest losing streak against the dollar in six years. With investors having pushed expectations of a UK rate hike back into next year, the British pound chalked up its seventh weekly loss against the greenback, a run not seen since the financial crisis of August and September 2008.
But traders bought back some of those cheaper pounds on Friday, squaring positions ahead of a long holiday weekend in Britain. A keynote speech from US Federal Reserve Chair Janet Yellen at the Fed's annual gathering of central bankers in Jackson Hole, Wyoming, failed to derail this short covering.
"Yellen didn't tell us anything hugely different, so there's nothing there to cause a massive selloff (in the pound)," said Kathleen Brooks, director at FOREX.com in London. "At the moment the market is very much focused on the bullish trend of the dollar, and as long as we stay below $1.6682 the outlook for the pound is still negative," she said. At 1445 GMT sterling was unchanged on the day against the dollar at $1.6580, still close to Thursday's trough of $1.6561, its lowest since early April.
From a technical perspective, this week's fall below the 200-day moving average - the first break of the long-term technical indicator in a year - suggests selling pressure on sterling against the dollar could persist. "Following the latest and decisive break below the 200-DMA (now resistance at $1.6682) we see the bears in full control, shooting for a straight extension towards $1.6394," wrote J.P. Morgan technical analysts in a note on Friday.
Sterling fared better against the euro, however, which came under increasing selling pressure as investors anticipate more monetary easing from the European Central Bank to counter the twin threats of recession and deflation. The pound was on course for its biggest weekly gain against the common currency in almost two months, with the euro trading down 0.3 percent on the day at 79.84 pence.
In the bond market, ten-year UK government bond prices approached one-year highs on Friday on signs of increased tension in Ukraine, but later tracked German and US government bonds lower. Ten-year gilt yields were flat on the day at 2.40 percent at 1415 GMT, after earlier sinking as low as 2.353 percent, within a whisker of the one-year low of 2.34 percent struck last Friday.
Gilts' yield spread over German Bunds and US Treasuries was little changed. There was no major economic news in Britain on Friday, with attention focused on Yellen's speech in Jackson Hole, where Bank of England Deputy Governor Ben Broadbent will speak on Saturday. Poor wage growth - average British pay is falling in real terms - has developed into the main barrier to the BoE making good on longstanding expectations that it would raise rates either in November of this year or early in 2015.