The GBP has Reached its Highest Level Since June, While the Euro is Rising as the Dollar Falls
The pound soared to a fresh 10-month high versus the dollar on Tuesday, while the euro rose to its highest level in two months, as market speculations on the conclusion of the US rate-hiking cycle weighed on the greenback.
Sterling touched $1.2475, its highest level since June 2022, and was last trading slightly below it, up 0.4%. The euro hit $1.0938, the highest level since early February, and was last up 0.17% at $1.0921.
"We've been suggesting that FX hasn't caught what's been occurring in rates, and there's still headroom for the dollar to drop a little further," said Derek Halfpenny, MUFG's head of global markets research. "Short-term spreads between core Europe and the United States have been more constant, with euro-dollar trading at $1.10 to $1.15."
Government bond rates in the United States and Europe fell substantially this month as investors sought safe-haven assets amid concerns about the banking sector, and while they have recovered slightly, they remain considerably below recent highs.
The German two-year yield has fallen 70 basis points from its March highs and was recently at 2.687%, but the swings in the United States have been much more dramatic.
The two-year yield in the United States was recently at 3.9978%, down a full percentage point from its early March highs, as traders reassessed expectations that the Federal Reserve would continue to raise interest rates.
The Institute for Supply Management (ISM) released data on Monday that showed manufacturing activity fell to its lowest level in nearly three years in March as new orders continued to fall, with all sub-components of its manufacturing PMI falling below the 50-point mark for the first time since 2009.
Traders believe the European Central Bank will continue to raise interest rates. There were other technical elements at work, notably for the pound, indicating that it may see additional increases.
"1.2448 has been a significant technical chart resistance level. This year has seen two highs "said Joe Tuckey, Argentex's head of FX research. "Breaking through this suggests it is an entry point for new sterling buyers, as well as a short covering zone for sterling shorts."
In another sign that the end of global rate hikes is near, the Reserve Bank of Australia (RBA) left its cash rate unchanged at 3.6%, breaking a run of ten consecutive hikes, as policymakers said more time was needed to "assess the impact of the increase in interest rates to date and the economic outlook."
The Australian dollar was last trading at $0.67465 down 0.6%. "(The RBA) appears comfortable that inflation has peaked and has chosen not to pull the trigger on rate hikes ahead of the quarterly inflation report in a few weeks," said Matt Simpson, senior market analyst at City Index.
"Unless the RBA is given with an unexpected increase in quarterly inflation, I believe the RBA will be content to sit at 3.6% for the next two to three months."
The dollar increased to 132.84 yen versus the Japanese yen, but the US dollar index, which monitors the currency against a basket of currencies, fell 0.1% to 101.92.