Pound spikes above USD1.26 as dollar under pressure before US nonfarms

(Alliance News) - Turmoil for US regional banks and the end of the Federal Reserve's tightening cycle helped the pound spike to a one-year high on Friday.

Analysts at UBS believe pressure on the dollar will persist, as other central banks across the globe still have the foot on the monetary tightening policy pedal.

The pound bought USD1.2613 on Friday morning, up from USD1.2579 at the time of the New York equities close on Thursday. Sterling fetched USD1.2634 earlier on Friday, a one-year-high.

Aside from the Fed calling time on its tightening cycle, a backdrop of banking tremors is also unlikely to be bullish for the greenback.

"Continued focus on the health of the US regional banks has seen levels of money market stress edge higher. US policymakers will be looking at ways to patch things up, but the clear overall trend should be one of tighter credit conditions and weaker US growth. This should help take the steam out of inflation and send the dollar lower," analysts at ING commented.

In the latest twist in the continuing turmoil in the US banking sector, shares in PacWest fell 51% after the lender said it had been approached by potential partners and investors over a potential sale.

The KBW Regional Banking index lost 3.5% while other midsized banks resumed a downward path. Shares in Western Alliance Bancorp fell 38% and Zions Bancorp slid 12%.

The euro bought USD1.1026, up from USD1.1016. Its intraday peak of USD1.1047 is not as lofty one-year-high, as the single currency was sold off slightly in the wake of the European Central Bank's 25 basis point interest rate hike on Thursday.

Still, like the pound, it may yet continue to rise against a beleaguered dollar, though analysts at Capital Economics are not so bullish on the single currency.

"We think that the tailwinds supporting the rebound in the euro against the US dollar have largely run their course, and still forecast the EUR/USD rate to return to parity as advanced economies fall into recessions later this year," Capital Economics analyst Jonathan Petersen commented.

ING is a bit more optimistic about the euro's prospects, however, in the wake of the European Central Bank announcing it is not done with rate hikes. However, they noted the central bank also referenced a "lag" to previous policy actions, which it did not do in its March policy statement, potentially suggesting it is mindful of over-tightening.

"We doubt such ECB equivocation will dent EUR/USD for too long. And in addition to what should clearly be supportive interest rate trends for EUR/USD this year should be much lower energy prices which have delivered a vast improvement in the euro's terms of trade. This is a complete reversal of conditions that were weighing on EUR/USD in the third quarter of last year. We suspect EUR/USD finds some good demand near 1.0900 now and we are just waiting for some softer US activity or price data to unlock a break of 1.1100," ING added.

By Eric Cunha, Alliance News news editor

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