The pound headed for the biggest gain since its post-election rally two weeks ago, benefiting from improved global risk sentiment and broad weakness in the dollar.
Sterling rose above $1.31 and outperformed all major peers Friday, on track for a weekly gain amid thin trading ahead of year-end.
The UK currency strengthened as riskier assets gained across markets, reflecting a pickup in global investor confidence as a thaw in US-China trade tensions brightens the world economic outlook.
The greenback fell against all Group-of-10 currencies, with the Bloomberg Dollar Spot Index set for the largest two-day slide since October.
While the pound surged to an almost 19-month high after Boris Johnson’s party won a majority in the December 12th UK election, it has since pared gains on concern Britain will take a hard-line stance in talks with the European Union.
“The dollar has a softer tone against several G10 pairs, the largest being the pound, though the softness seems stemmed from the overall risk-on tone of late rather than specific news,” strategists at NatWest Markets led by John Briggs wrote in a note.
Sterling rallied as much as 0.9% to $1.3115, climbing above its 21-day moving average for the first time in a week. Against the euro, the UK currency appreciated 0.3% cent to 1.1743.
Option prices signalled improved confidence on the pound. One-week sterling-dollar risk reversals climbed to 21 basis points in favour of put options, indicating the least bearish sentiment since early December.
“The pound may stabilise and possibly rally into January and February before trade negotiations come back to haunt in mid-March ahead of the EU ” – Bloomberg