Sterling recovered from a 15-month low against the dollar on Monday as the greenback took a pause from a rally driven by the expectation that the United States is moving closer to raising interest rates. Data on Friday showed US employers added the most jobs in nearly three years in November - the latest sign that the US recovery is gaining momentum, prompting investors to bring forward their expectations of when the Federal Reserve will hike interest rates to the middle of 2015.
By contrast, UK rate hike expectations have been pushed back substantially over the past few months. Up until the summer, many investors had expected the Bank of England to increase interest rates by the end of 2014, but they now do not expect a rate rise until late next year or even early 2016. Sterling fell to as low as $1.5541 as the dollar rallied in early European trading, its weakest since early September 2013. It later recovered and was last trading at $1.5621, up 0.2 percent on the day. Against the euro, sterling was up 0.2 percent at 78.695 pence.
Adam Cole, head of FX strategy at RBC Capital Markets, said the pound had been given some help by a BoE survey that suggested British borrowers may be able to cope with higher rates. But he added that politics would weigh on the currency ahead of May's national election.
"As we get into the new year I think we think more and more about politics and less about numbers," Cole said. "It doesn't really seem to be on the markets' radar yet but the political risk premia are a big driver ... (and are) a good reason to be cautious on sterling, whatever the rate outlook." The expectation that the Fed would hike rates before the BoE raised the yield gap between the two-year US Treasury yield and British gilts to its widest since September 2012 earlier on Monday, according to Reuters data. "US swap rates are moving in the dollar's favour and there is speculation that the Fed may harden its stance when it meets next week," said Petr Krpata, currency strategist at ING. "Given that, it's tough for anyone to bet against the dollar."