Pound hits highest since June

The pound rose to a new 10-month high against the dollar on Tuesday, and the euro reached its highest in two months, as the greenback continued to be hurt by market bets that the end of the U.S. rate-hiking cycle is near.

Sterling reached $1.2475, its highest since June 2022, and was last just below that level, up 0.4%.

The euro reached $1.0938, its most since early February, and was last up 0.17% at $1.0921.

"We’ve been saying that FX hasn’t really captured what’s been happening in rates, and there is scope still for the dollar to weaken a bit further," said Derek Halfpenny head of research for global markets at MUFG.

"Short term spreads between core Europe and the U.S. are more consistent with euro-dollar trading near $1.10 to $1.15."

U.S. and European government bond yields fell dramatically last month as investors rushed to buy safe haven assets due to fears about the banking sector, and while they have rebounded a little they remain well below recent highs.

The German two-year yield has dropped 70 basis points since its March highs and was last at 2.687%, but U.S. moves have been even more dramatic.

The U.S. two-year yield was last at 3.9978%, down a full percentage point from its early March highs, after the banking turmoil caused traders to reassess expectations that there were still several Federal Reserve rate hikes ahead.

The latest data to support that was from a Monday survey by the Institute for Supply Management (ISM) that showed that manufacturing activity fell to the lowest in nearly three years in March as new orders continued to contract, with all sub-components of its manufacturing PMI below the 50 threshold for the first time since 2009.

Traders still think the European Central Bank has more rate hikes to come.

There were also technical factors in play, particularly for the pound, suggesting it could have further gains ahead.

"1.2448 has been a huge technical chart resistance. It has been a high twice this year," said Joe Tuckey, head of FX analysis at Argentex.

"Breaking through this means it is an initiation point for fresh sterling buyers, a short covering area for sterling shorts."

In a further sign that the end of global rate hikes is approaching, the Reserve Bank of Australia (RBA), as expected, left its cash rate unchanged at 3.6%, breaking a run of 10 straight hikes as policymakers said additional time was needed to "assess the impact of the increase in interest rates to date and the economic outlook".

The Australian dollar was last down 0.6% at $0.67465.

"(The RBA) seem content that inflation has peaked and opted to not pull the hiking trigger ahead of the quarterly inflation report in a few weeks," said Matt Simpson, senior market analyst  at City Index.

"Unless the RBA are presented with a surprise uptick on the quarterly inflation print, I think the RBA will be happy to sit with 3.6% for the next two to three months."

Elsewhere, the dollar rose to 132.84 against the Japanese yen, and the U.S. dollar index, which tracks the unit against a basket of currencies dipped 0.1% to 101.92.