Sterling rallied to a two-week high against the US dollar on Tuesday and extended gains against the euro after a surprisingly strong rise in Britain's services sector rekindled expectations of a near-term rate hike. With most investors already factoring in the chance of an interest rate rise by the European Central Bank on Thursday, traders said the euro could shed some more ground against the pound in the near term.
Sterling's gains against the euro on Tuesday were also helped by a Moody's downgrade of Portugal's credit rating and a rise in Chinese interest rates, which knocked the common currency's numbers even lower from a five-month high versus the dollar. Against the dollar, the pound rose nearly 0.9 percent to a two-week high of $1.6279. It rallied from around $1.6155 before the UK services sector PMI data was released, as investors moved to price in greater chances of a Bank of England rate hike in May and June.
Traders reported option barriers ahead at $1.6280/1.6300. The UK PMI index showed the service sector growing at its fastest pace in over a year and pointed to solid first-quarter GDP growth, making a Bank of England rate rise in May more likely.
Since services constitutes the bulk of the economy, analysts said the numbers brighten the chances of a robust first-quarter performance and could strengthen chances of a rate hike in May. Financial markets are fully pricing a 25 basis point rate hike by the Bank of England (BoE) in July. The euro was down at 87.29 pence, having broken trendline support taken from the February 18 low in the 87.65 area.
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