Pound touches three-year high against the dollar

Sterling hit a high of $1.425 against the dollar. Photo: Dinendra Haria/SOPA Images/LightRocket via Getty Images
Sterling hit a high of $1.425 against the dollar. Photo: Dinendra Haria/SOPA Images/LightRocket via Getty Images

The pound reached to a three-year high against the dollar on Tuesday, boosted by thin trade that gave relatively small market moves outsized influence on the price.

Sterling hit a high of $1.425 against the dollar (GBPUSD=X) in early morning trade. By 9.25am in London, it had fallen to a loss of 0.1% against the greenback to $1.4188. The early high marked the highest level since mid-2018 for the pairing and cable remained close to those levels.

The pound was flat against the euro to €1.1624 (GBPEUR=X).

The early move higher for cable extends a rally that began at the start of this year with the resolution of Brexit. In recent weeks the pound has been boosted by concerns about runaway inflation in the US. Freddy Colquhoun, investment director at JM Finn, said strong housing data published on Monday provided a fresh spur.

The pound was trading against the dollar at levels not seen since mid-2018. Photo: Yahoo Finance UK
The pound was trading against the dollar at levels not seen since mid-2018. Photo: Yahoo Finance UK

Analysts cautioned against reading too much into Tuesday's move higher.

"On the whole, the G10 market remains fairly rangebound, though we are approaching a number of key levels across the board, perhaps meaning that ‘decision time’ about the market’s next direction is not too far away," said Michael Brown, a senior market analyst at Caxton.

Sterling's early rally came amid thin volumes in currency markets. Traders were off on Monday for holidays in the US and UK. In Britain, many will be away for the whole week due to school half-term.

Relatively few buyers and sellers in the market means the impact of trades can be outsized relatively to the norm. Smaller purchases than usual can move prices, perhaps over- or understating the true position of the pound in the longer-run.

"On the currency front, the action was confined to very narrow ranges," John Fahey, a senior economist at AIB, said of Monday's action. "It could be another day of narrow range trading."

The pound's early creep higher came despite rising concerns about a COVID-19 third wave that could be developing in Britain. New COVID-19 cases have now topped 3,000 per day for almost the last full week.

"As long as the Fed’s position remains unchanged and the good UK economic continues, cable looks set to make further topside gains," said Stuart Cole, head macro economist at Equiti Capital.

"The main obstacle to sterling in the immediate future is probably fears over whether the current ‘Indian’ Covid variant will yet see the Government forced to push back the 21st June restriction lifting deadline. But I expect there will be an intense effort to get as many people vaccinated as possible within the next three weeks to avoid having to do this."

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