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 UK currency strengthened as riskier assets gained across markets, reflecting a pickup in global investor confidence as a thaw in US-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 December 12th UK election, it has since pared gains on concern Britain will take a hard-line stance in talks with the European Union.
“The dollar has a softer tone against several G10 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 per cent to $1.3115, climbing above its 21-day moving average for the first time in a week. Against the euro, the UK currency appreciated 0.3 per cent to 85.15 pence.
Option prices signalled improved confidence on the pound. One-week sterling-dollar risk reversals climbed to 21 basis points in favour of put options, indicating the least bearish sentiment since early December.
UK government bonds were little changed, with the 10-year yield at 0.76 per cent.
“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 stabilise and possibly rally into January and February before trade negotiations come to back to haunt in mid-March ahead of the European Council. " – Bloomberg
