Pound near three-month high, dollar awaits inflation data

by Jonathan Adams

The pound changed hands at 85.83 pence per euro, near its five-week high of 85.615 pence per euro

The British pound held firm near a three-month high against the dollar on Friday on rising expectations of an earlier than expected rate hike by the Bank of England, while the U.S. currency looks to upcoming inflation data

The British pound held firm at $1.4203 after a gain of 0.58% on Thursday after a Bank of England (BoE) policymaker said the central bank was likely to raise rates well into next year.

Gertjan Vlieghe also noted an increase could come earlier if the economy rebounds more quickly than expected.

Against the euro, the pound changed hands at 85.83 pence per euro, near its five-week high of 85.615 pence per euro. On the yen, the pound hit a three-year high of 156.02 yen.

The euro stood at $1.2192, hovering below its 5 1/2-month high hit on Tuesday of $1.2266 as dovish comments from European Central Bank (ECB) officials sapped its momentum ahead of its policy meeting on June 10.

The dollar climbed to 109.85 yen, breaking out of its tight range over the past few weeks, to reach its highest levels in nearly seven weeks.

The jump likely reflected yen selling due to MSCI’s reshuffle of its standard stock index, from which nearly 30 Japanese names were dropped, analysts said.

The yen was hampered also by concerns about a delay in Japan’s economic recovery after media report that Japan is looking to extend a state of emergency in Tokyo and several other areas by three weeks to June 20.

In addition, the dollar enjoyed a boost from higher U.S. bond yields after a New York Times report that President Joe Biden will announce on Friday a $6 trillion budget for 2022.

The proposal came as the U.S. economic recovery appears to gain momentum.

The number of Americans filing new claims for unemployment benefits dropped more than expected last week to a seasonally adjusted 406,000 with companies desperate for workers to meet surging demand unleashed by a rapidly reopening economy.

The initial claims figure we just saw was pretty good, so obviously expectations are building up for a strong reading on the monthly payrolls data due next week, said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

Ahead of the payrolls data, U.S. inflation data due at 1230 GMT on Friday is one of the biggest focuses, as a high reading could fuel expectations of policy tightening by the Federal Reserve.

Economists expect core PCE (personal consumption expenditures) prices climbed 2.9% year-on-year (YOY) in April, compared with a YOY rise of 1.8% a month earlier.

While that is way above the Federal Reserve’s target of 2%, economists expect core inflation to gradually slow later in the year, thus allowing the Fed to stick to the current size of asset purchases for the time being.

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