LONDON: Sterling ended only slightly lower on Friday, riding out a rough few hours of trading after a strong US labour market readout that ultimately did little to alter the consensus on the likely course of US monetary policy. The dollar surged against a range of currencies following the jobs numbers, hitting a day's low of $1.6821 against sterling, only to hand back all those gains later in the afternoon.
There are strong supporting factors for sterling, chiefly a UK economy that is growing far faster than its peers in Europe, propping up market expectations of a first rise in interest rates within the next 12 months.
That underlying bullishness, on a currency that has gained 10 percent in trade-weighted terms within the past year, helped to limit falls and saw the pound end the day just 0.1 percent lower at $1.6876.
"If you look at the US rates market, it has not really shifted; the view is that the Fed's view isn't going to change dramatically on this one report," said Derek Halpenny, strategist with BTM-UFJ in London.
"We're still quite positive on sterling, we can certainly see it pushing above $1.70 at some stage."
The pound had neared five-year highs against the dollar on Thursday following a robust UK manufacturing purchasing managers' survey (PMI), but there was no further fuel for the currency in a strong, but just below-forecast, reading from the construction sector on Friday.
Like a number of analysts at the larger banks, Ian Stannard, European head of currency strategy at Morgan Stanley in London, has turned more cautious on the pound's prospects, particularly against the dollar.
POSITIVE POTENTIAL LIMITED
"We are not going to rule out any further upside but it will be increasingly difficult to get further positive surprises on the economy," he said.
Many economists argue that Britain's upturn remains largely a matter of rising house prices in a small number of cities, fuelling the same sort of credit bubble that prefaced the financial crisis of 2007-8.
As a result, Stannard is one of a number of analysts now speculating that some sort of macroprudential steps may preface - and potentially delay - the rise in interest rates that markets have priced in for early next year.
Bank of England deputy governor John Cunliffe delivered the bank's starkest warning yet on the issue on Thursday, saying it would be dangerous to ignore the momentum of rising house prices.
"If the market has indeed been dazzled by a performance that has been centred on the housing sector, and has therefore misconstrued the likely policy mix going forward, then there is clearly the potential for sterling to have the wind taken from its sails at some point," said Neil Mellor, strategist with Bank of New York Mellon in London.
The Bank of England is likely to try to cool the housing market initially with lending limits and other steps that do not raise official returns on the pound, but analysts say their effectiveness may only be limited.
"I definitely think we will see some sort of announcement from the next Financial Policy Committee meeting, they all seem to be arguing towards that," said Halpenny.
"But it is going to be difficult for that to have any serious impact on the market and I think in the end they will have to take direct action through rates."
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