Sterling climbed above $1.55 on Friday, drawing support from a rally in the euro on optimism that Greece was making progress in its efforts to secure more funding and stay in the currency union. The British currency had fallen to a one-month low earlier in the week as interest rate differentials drove a surge in the dollar, but it regained ground thanks to robust housing data and a UK Budget that was less austere than many had expected.
By late afternoon in London, the pound had gained 0.8 percent to $1.5505, compared with a low of $1.5330 hit on Wednesday. "There continues to be a lot of volatility out there and relatively little volume," said a dealer with an international bank in London. "What is clear is that the pound is tracking the euro's moves to some extent." Against the euro, which was stronger across the board after Athens offered last-minute concessions to try to save Greece from financial meltdown, sterling inched 0.4 percent lower to 72.05 pence.
"In terms of going forward, we're focusing a lot on next week's employment data, particularly the average earnings," said Michael Sneyd, FX strategist at BNP Paribas in London. "As wage growth increases, that's a key part of our call for the Bank of England to raise rates ahead of the market expectations." On Thursday the Bank of England offered no surprises with its decision to keep its benchmark interest rate at the record low of 0.5 percent as policymakers grapple with how to balance Britain's improving wage growth against more ominous signals from the global economy.
Strategists are split over when the central bank will begin increasing rates, though the consensus is for around the middle of next year. BNY Mellon strategists, unlike BNP's Sneyd, argued that Bank of England Governor Mark Carney appeared to share the same growth-oriented focus as his predecessor, Mervyn King, and the market was pricing in a rate hike too soon. "The BoE might well have in mind a threshold for policy tightening that is somewhat higher than generally appreciated," they wrote.