Sterling pushed to $1.2770 after the dollar index slid 1.7% on the week. The June payrolls miss shifted rate-cut expectations, narrowing the US-UK rate differential to 25bp. Next test: Thursday's CPI print.
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Pound Sterling pushed to $1.2770 in early London trading on Friday, its highest since late March, after the greenback suffered its steepest weekly slide in more than two months.
The dollar index dropped 1.7% over the week following the June payrolls report. The US economy added 206,000 jobs, below the 240,000 consensus estimate. The miss pushed traders to price in a 72% chance the Federal Reserve holds rates steady at the July meeting, according to CME FedWatch data.
The rate differential has shifted in favor of the pound. The Bank of England has kept its benchmark at 5.25% since August. The Fed's rate sits at 5.50%. The gap now stands at 25 basis points, down from 75 basis points at the start of the year.
UK gilt yields ticked higher on Friday. The 10-year yield rose 3 basis points to 4.18% as money markets pared bets on a BOE rate cut in August. Traders now see a 45% chance of a quarter-point reduction at the August meeting, down from 55% before the US jobs data.
Traders said the dollar's weakness was amplified by position squaring ahead of the US Independence Day holiday. Some hedge funds cut long-dollar bets that had built up over the past month, they said. The dollar had rallied 4.5% from its March low to its June peak on expectations the Fed would keep rates higher for longer.
Euro-dollar rose to $1.0820, its highest since mid-June. The dollar fell 0.8% against the yen to 160.20. The yen's gains came despite the wide rate differential between the US and Japan. The Bank of Japan has kept its benchmark rate at 0.10%.
The UK Services PMI fell to 48.8 in June, signaling contraction in the sector. The composite index remained above the 50 expansion mark, supported by a rebound in manufacturing.
The next major test for the dollar comes Thursday with the June consumer price index. The CPI data will either reinforce the case for a September rate cut or revive the dollar's rally. For sterling, the focus shifts to UK GDP data for May, due Friday, which will show whether the economy maintained its momentum after exiting recession in the first quarter.
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