The pound extended its rally on Monday, reaching its highest level in over a month against the dollar, as a decline in U.S. bond yields continued to weigh on the American currency. Sterling was up 0.23% at $1.2409, following its best weekly performance in a year last week with a rise of 2.1%.
The U.S. dollar index, which measures the greenback against other major currencies, dropped 1.4% last week after the Federal Reserve kept interest rates steady and economic data suggested a potential slowdown in the U.S. economy. The index eased a further 0.13% on Monday.
Sterling was marginally stronger against the euro, with the single currency down 0.1% at 86.62 pence.
According to Francesco Pesole, FX strategist at ING, the main factor behind the pound’s rise is the weakness of the dollar. Pesole believes that the key question is whether the U.S. currency can continue its downward trend or if it will rebound in the coming weeks. He also mentioned the need for consistent softening in U.S. data, which may not transpire.
However, the gains made by sterling were tempered by new survey data indicating that the UK construction sector experienced a second consecutive month of contraction in October due to higher borrowing costs impacting house-builders. A gauge of the broader economy, which includes services and manufacturing, showed a slight improvement in October compared to September, but still remained in contraction territory.
In recent months, financial markets have been heavily influenced by a significant increase in U.S. bond yields, driven by a strong American economy. However, the Federal Reserve’s meeting last week, combined with softer U.S. data, has raised hopes among investors that the next move in interest rates will be a decrease. This has resulted in global bond yields dropping and stocks and non-dollar currencies rallying.
The Bank of England also decided to keep interest rates unchanged at 5.25%, a 15-year high, last week. The central bank painted a gloomy picture of the UK economy, which is expected to show a contraction of 0.1% in the third quarter, following a growth of 0.2% in the previous three months.
The next significant event for the UK economy will be the release of gross domestic product (GDP) data on Friday, which is expected to confirm the contraction in the third quarter.
This news article was written by Harry Robertson and edited by Kirsten Donovan.
More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )