Sterling set to break $2 barrier after hitting 14-year peak
The pound is close to breaking through the $2 psychological barrier after hitting a 14-year high for a second day against the battered dollar.
Sterling has been one of the best performers against the dollar this year, fuelled by inflation-busting Bank of England rate hikes, inflows from mergers and acquisitions, and central bank reserve purchases.
Weaker than expected UK factory activity data knocked sterling away from the earlier peaks, prompting a bout of profit-taking from this week's hefty buying, but the pound was finding firm support around the $1.9640 area.
Dealers and analysts remained bullish on the pound achieving $2, not seen since Britain was forced to abandon Europe's pre-euro Exchange Rate Mechanism, as the euro scored a 20-month high against the dollar for an eighth day running, with expectations for the Europen Central Bank to raise interest rates seen as solid support.
"There's a good chance we'll see sterling/dollar hitting $2 within the next week or so, overall sterling remains well-supported," BNP Paribas senior currency strategist Ian Stannard said, adding that economic data particularly from the housing sector was keeping alive speculation that the BoE could hike rates beyond 5.00 per cent next year.
By 11:04 GMT, sterling had hit $1.9748 before retreating to $1.9665, steady on the day. Against the euro, the pound was flat at 67.30 pence, off an earlier 3-week high.
Trade-weighted sterling opened at its highest since April 2000 at £104.50, later falling slightly to £104.30.
The rise in the Bank of England's trade-weighted index came after BoE governor Mervyn King sounded a sanguine note on sterling's strength on Thursday, pointing out its stability against the broader basket of currencies.
After robust housing figures from the Nationwide Building Society on Thursday proved the final catalyst in taking sterling to the 1992 highs, investors had looked closely at Friday's UK factory activity data.
The CIPS/RBS Purchasing Managers Index unexpectedly fell to 52.6 in November from a downwardly revised 53.5 in October to record the lowest reading since March and confound analysts' forecasts for an improvement to 54.0.
"The PMI survey was significantly softer than expected, which will fuel concerns that the manufacturing sector was losing momentum even before sterling's recent strengthening," Global Insight chief UK and European economist Howard Archer said in a note to clients.
Archer said the data reinforced expectations for the Bank of England to leave rates unchanged at 5.00 per cent this month and in the early months of next year.
Economists polled by Reuters this week said UK interest rates have likely peaked and will probably stay on hold next year as growth eases and inflation falls, but any signs of higher wage deals could still prompt a rate rise early in 2007.
