The euro strengthens with sterling as UK fiscal anxiety subsides and European inflation quickens.

(Reuters) TOKYO – As a result of the Bank of England’s efforts to calm the markets and the European Central Bank’s hawkish signals, the pound and the euro reached new one-week highs on Friday.

As the BOE entered the debt market to buy gifts for a second day on Thursday, lifting UK rates, the British pound was on track for its best week against the US dollar in two and a half years. [GB/]

The hot consumer inflation statistics from Germany and the Netherlands also served as a reminder that the ECB, BoE, and other central banks still have work to do; the figure for the larger 19-country eurozone is due later on Friday.

Early in the Asian trading day, the pound reached $1.1222. This was almost enough to make up for all of the big losses caused by the “short budget” that the new government presented last Friday.

Later in the day, it gave some of those gains back, but it was still up 0.12% at $1.11325 at 05:22 GMT, on course to increase 2.61% this week, the most since March 2020. Despite hitting a record low of $1.0327 on Monday, this persists.

Sean Callow, a strategist at Westpac in Sydney, said, “The recovery in cable (the sterling-dollar rate) is really eye-catching.”

“Given that UK yields are expected to remain high for a while, it makes some sense because short positions are discouraged. “However, given that the UK is already running very substantial current account deficits, we suspect that sterling will appreciate much further.”

After reaching a high of $0.9844 earlier, the euro remained roughly unchanged at $0.98145.

The shared currency has recovered from a new two-decade low of $0.9528 on Monday and is on track to post a 1.32% weekly gain, which would be its best performance in four months.

However, during the Asian session, liquidity among European currencies was incredibly low.

Data released on Thursday showed German inflation at its highest level in more than 25 years, with economists warning that the impact of the energy crisis has not yet fully materialized.

The CBS Agency agenAgencys that rising energy costs caused inflation in the Netherlands to reach its highest level in decades in September.

A further 75 basis point (bps) increase by the ECB is fully priced into the markets for next month, with a 1-in-3 chance of a full percentage point increase.

Gediminas Simkus, an ECB policymaker, told Bloomberg TV outside of a conference in Vilnius, “My choice would be 75, but 50 is the minimum.”

Even though the ECB’s next meeting isn’t until October 27 yet, colleagues like Finland’s Olli Rehn, Slovakia’s Peter Kazimir, and Austria’s Robert Holzmann have all recently proposed 75 bps.

The BOE is expected to tighten by 125 basis points in early November, with slim chances of a 150-basis-point hike.

The dollar index, which compares the value of the dollar to the euro, the pound, and four other important currencies, managed to move up 0.12% to 111.93, but it was still very near to the one-week low of 111.64 set overnight.

The Cleveland Fed President, Loretta Mester, stated on Thursday that “price stability is still job one” and that inflation must be controlled before policymakers can worry about the impact on economic growth. This was despite continuous hawkish language from the Federal Reserve.

The dollar was barely changed at 144.55 yen and has been generally moving sideways below the key 145 lines ever since Japanese officials intervened to buy the yen last week when the dollar soared to a new 24-year high at 145.90 yen.

The Finance Minister, Shunichi Suzuki, hinted on Thursday that he might be willing to step in again if there were more speculative changes in the value of the yen.

The amount that Japan’s government spent on the intervention and the amount it has set up in reserve for more such action will be made public later on Friday.

Shinichiro Kadota, a strategist at Barclays (LON:BARC) in Tokyo, says that fears of intervention are keeping the dollar-yen from going up.

In the end, the dollar-yen exchange rate will be set by fundamental factors, like how different the Fed and BOJ’s policies are, not by intervention, especially unilateral intervention.

The risk-sensitive Australian dollar fell 0.08% to $0.6495, while the kiwi fell 0.1% to $0.57225, putting both currencies on pace for their worst monthly performances since April.

In spite of what the market thinks, both countries’ central banks are likely to keep raising interest rates next week.