Shockingly strong U.S. jobs data on Friday bolstered expectations of a rise in U.S. interest rates next month and a resulting surge for the dollar towards parity with the euro.
But dealers said markets had been firmly in consolidation mode on Monday.
“There is a gap to fill, post non-farm payrolls,” said Tobias Davis, a currency hedging manager with Western Union in London.
“Markets don’t like gaps, so my read is the market deservedly is taking a breather. This all seems like intra-day noise.”
By 1702 GMT, sterling was up 0.4 percent on the day at $1.5118, almost all of that gain coming in the last hour of trade in London. That was still within sight of Friday’s more than six-month low of $1.5027. Against the euro, the pound was 0.3 percent stronger at 71.20 pence.
If the BoE is set to delay any monetary tightening of its own well into next year, many argue the pound can be expected to suffer further. Strategists from the currency market’s third biggest banking player, Barclays, made betting on the dollar against the pound their trade of the week.
“We recommend shorting GBP/USD going into Wednesday’s UK employment report,” they said in a weekly note released on Monday, pointing to a breaking of longer-term support at $1.5180 on Friday.
“A soft print in wage growth and slower job creation would add pressure to the pound, eyeing a low of 1.4566.”
Although the Bank of England is forecast to be the next major central bank to raise interest rates after the Fed, markets have pushed out their expectations of when UK rates will rise from their historic lows until late 2016.
BoE Governor Mark Carney signalled on Thursday that he was in no hurry to raise interest rates, and flagged risks to UK growth from external developments.
A number of banks said that, after that message from Carney, they expected unemployment and wage numbers this week to be soft. Others point to broader risks from a complicated picture of high external deficits, booming house prices and poor underlying growth with which the bank has struggled over the past few years.
“I’m extremely bearish on sterling. I think we’re heading towards the $1.30s within the next four to five months,” said a dealer with one large foreign bank in London.
“Carney and the whole BoE message last week has dialled back, big-time, on the rate outlook, and I think the current account and Brexit are going to be big problems next year.”
(Editing by Kevin Liffey)