Sterling falls 1% versus dollar, rises against euro

LONDON (Reuters) – Sterling declined 1% to $1.3216 as the dollar strengthened against a basket of currencies on safe-haven demand and Fed rate hike expectations following robust U.S. labour market data.

Russian forces seized Europe’s largest nuclear power plant on Friday in what Washington called a reckless assault that risked catastrophe.

Meanwhile, data showed that U.S. job growth surged in February, raising optimism that the economy could withstand mounting headwinds from geopolitical tensions, inflation and tighter monetary policy.

“With equities sharply lower, significant USD demand being seen once again, and a weekend full of unpredictable geopolitical risk awaiting, the last thing that market participants want to do is hold a high-beta currency such as the GBP,” Caxton Head of Intelligence Michael Brown said.

“The technical landscape also looks pretty soggy, with the YTD low having given way earlier, leaving the Dec 20 low of 1.3160 as the bears’ next target,” Brown added.

Against the euro, sterling rose for the fifth consecutive trading session to its highest level since 2016 at 82.29 pence before paring some gains. For the week, sterling was up 1.8% against the single currency.

The outlook for monetary policy between global central banks following Russia’s invasion of Ukraine continues to be a key theme.

The Bank of England is still expected to lift its interest rate for the third consecutive meeting when it meets this month, although the chances of a 50 basis point hike have declined since Russia invaded Ukraine.

“The bank is highly unlikely to hike by 50bps as markets were expecting in mid-February (odds still sit at about 20%), and it may even strike a cautious tone that would raise the possibility of a hold in May as they assess the indirect impact of the war on the UK economy,” Scotiabank Chief FX strategist Shaun Osborne said.

Even so, money markets are still pricing in 126 basis points of tightening from the BoE this year.

By contrast, markets are pricing in just 23 basis points of rate hikes from the European Central Bank by the end of the 2022.

Before the conflict, markets had been pricing in around 50 basis points of ECB tightening by December.

Elsewhere, a survey showed that Britain’s construction sector grew at its fastest pace since mid-2021 last month as disruption from the Omicron coronavirus wave eased and input costs rose at the slowest pace in nearly a year.

(Reporting by Samuel Indyk; Editing by Alison Williams and Raissa Kasolowsky)