Sterling Hits Two-week High

The pound hit a two-week high on Tuesday, while the Aussie dollar was among the major losers after Australia's central bank raised interest rates less than expected.

In what was its sixth hike in as many months, the Reserve Bank of Australia (RBA) raised rates 25 basis points to a nine-year peak of 2.60%, though markets had pencilled in a 50bps hike.

AUD fell 0.2% against the pound and 0.25% against the US dollar and 0.6% versus the euro.

Sterling, meanwhile, reached a two-week high in the wake of the UK government's U-turn on plans to axe the top rate of tax.

With GBP/USD having hit a historic low of US$1.035 in the aftermath of chancellor Kwasi Kwarteng's contentious mini-budget this morning rose 0.7% to US$1.1429 before dropping back slightly.

Analysts said Cable remained under significant pressure in the face of a looming recession and with the US Federal Reserve likely to continue aggressive rate rises.

But the Bank of England has signalled via its daily bond auctions, which it was forced to launch last week to following the budget, that it is not aiming to keep UK government borrowing costs low.

Monday’s auction saw just over £22 million spent by the Bank while it rejected almost £1.9 billion of bond offers.

Mark Capleton, rates strategist at Bank of America, told media that Threadneedle Street’s small gilt purchases signalled it was only acting as a “circuit breaker” and did not want to be perceived as trying to cap borrowing costs.

Elsewhere, the dollar remained in correction mode, with the dollar index (DXY) nearly 3% off its 28 September peak.

“In our view, this has not been accompanied by a radical change in the medium-term narrative that has backed the dollar rally so far: despite somewhat weaker-than-expected ISM manufacturing figures yesterday, the US domestic story remains rather solid, leaving the Fed tightening prospects alive even if markets have recently revised the expected terminal rate to sub 4.50% levels,” said ING bank.

Friday’s US jobs report is seen as a potential trigger for a fresh hawkish re-pricing, and a positive event for the dollar.

The euro was on the up in a number of pairs.

EUR/USD was seen as benefitting from the improvement in global risk sentiment and the dollar correction, though the moves were not particularly bullish given the economic gloom and reports from Ukraine.