Sterling rose to a new 10-week high against the dollar on Friday and pulled itself out of a six-month trading range against the euro, prompting investors to unwind their long euro positions.
Against the euro, the pound has been trapped in an 86.5 pence to 90 pence per euro range for nearly six months. But cautious minutes from the European Central Bank this week and firm expectations of a rate hike from the Bank of England in May thrust the British currency up to an 11-month high.
“This is a technical-driven rally caused by the currency breaking out of established trading ranges prompting a wave of position-covering by some funds but we need more fundamental drivers for the rally to sustain,” Danske Bank currency strategist Morten Helt said.
Against the euro currency exchange rate, sterling rallied 0.4 percent to 86.32 pence per euro, its highest since late May 2017. On a weekly basis, it is set for its biggest gain since Dec. 1.
It later drifted lower but was still up 0.2 percent at 1630 GMT.
Sterling also pushed towards a new post-Brexit referendum high versus the dollar, rising 0.4 percent to $1.4296 before giving up some of those gains in later European trading. It hit its highest since the 2016 vote in late January 2018, at $1.4346.
Expectations of a rate rise have been a major driver of sterling’s gains in recent days while the euro has suffered from more top policymakers’ comments about its recent strength, and some lacklustre data.
The market is pricing in a 65-percent chance of a 25 basis point hike next month.
Next week a raft of British economic data including crucial numbers on the state of the labour market are due.
“We think signs of firming wage growth next week may seal the deal for a May BoE rate hike – though it is the UK activity side that may hold the key to the pace of BoE normalisation and GBP’s cyclical re-pricing,” said Viraj Patel, a currencies analyst at ING.