Pound Set for Best Gain in Two Weeks Amid Broad Dollar Weakness

(Bloomberg) -- The pound headed for the biggest gain since its post-election rally two weeks ago, benefiting from improved global risk sentiment and broad weakness in the dollar.

Sterling rose above $1.31 and outperformed all major peers Friday, on track for a weekly gain amid thin trading ahead of year-end. The U.K. currency strengthened as riskier assets gained across markets, reflecting a pickup in global investor confidence as a thaw in U.S.-China trade tensions brightens the world economic outlook.

The greenback fell against all Group-of-10 currencies, with the Bloomberg Dollar Spot Index set for the largest two-day slide since October. While the pound surged to an almost 19-month high after Boris Johnson’s party won a majority in the Dec. 12 U.K. election, it has since pared gains on concern Britain will take a hardline stance in talks with the European Union.

“The dollar has a softer tone against several G-10 pairs, the largest being the pound, though the softness seems stemmed from the overall risk-on tone of late rather than specific news,” strategists at NatWest Markets led by John Briggs wrote in a note.

Sterling rallied as much as 0.9% to $1.3115, climbing above its 21-day moving average for the first time in a week. Against the euro, the U.K. currency appreciated 0.3% to 85.15 pence.

Option prices signaled improved confidence on the pound. One-week sterling-dollar risk reversals climbed to 21 basis points in favor of put options, indicating the least bearish sentiment since early December.

U.K. government bonds were little changed, with the 10-year yield at 0.76%.

“Pound topside is very much in vogue these days,” Stephen Innes, chief Asia market strategist at AxiTrader Ltd., wrote in a note. “The pound may stabilize and possibly rally into January and February before trade negotiations come to back to haunt in mid-March ahead of the European Council.”

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Anil Varma, Anooja Debnath

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