LONDON (Reuters) - Britain’s pound jumped above $1.31 for the first time since early August on Thursday, pulled up by a euro that was stronger across the board on the view that the head of the European Central Bank had not tried to strongly talk down the euro.
With the euro trading around its strongest levels since January 2015 against the dollar, and with banks such as Morgan Stanley calling for the euro to reach parity with the pound in the coming months, there had been much market chatter that ECB chief Mario Draghi would try to knock the currency.
But though he talked about the downward effect on inflation from euro strength, Draghi did not send a strong signal that the bank was ready to intervene to weaken the euro should it continue to strengthen and push down price growth.
The euro climbed to 92.035 pence after the ECB press conference, about a penny away from an 11-month high touched against sterling last week.
“The actual FX reference was very much a currency reference rather than a verbal intervention – that was lukewarm at best,” said Neil Jones, head of hedge fund FX sales at Mizuho.
“It wasn’t designed to turn the euro south, which is the whole point of verbal intervention ... The market took that as a bullish signal.”
As the dollar weakened to a 20-month low against a basket of currencies on the back of the euro’s renewed strength, sterling reached $1.3116, its strongest in five weeks, before dipping back below $1.31 by 1645 GMT.
Traders said there was a growing weight of offers to sell sterling around $1.31-$1.32 which were likely to cap any further gains.
“We’ve reached a point where there is strong two-way demand in the Cable (sterling/dollar) rate, ultimately leaving the major pair in a lot of choppy up-and-down,” analysts from LMAX Exchange said in a morning note.
Investors have doubled net speculative bets against the pound and in favour of the dollar in the past three weeks, taking them to their highest since early May.
Analysts polled by Reuters this week said that sterling stood a one in four chance of weakening to parity with the euro in the coming year, although only a few said that was their central forecast.
Reporting by Jemima Kelly; Editing by Andrew Heavens