Sterling rose in European trade on Friday for the third straight session against dollar, trading above $1.26 for the first time in a year due to the strength of the UK banking system compared to Europe and the US.

Dollar declined as well as the US banking crisis deepens, which might push the economy to recession faster than expected, with traders already pricing in potential rate cuts later this year. 

GBP/USD rose over 0.5% to 1.2634, the highest since May 2022, after rising 0.1% yesterday, the second profit in a row on strong sentiment in the UK.

Sterling, the Best Performing Major Currency in 2023

Sterling is the best performing major G8 currency in 2023 due to strong UK data and the strength of the banking sector.

The pound's strength could be clearly linked to the strength of UK banks, which resisted recent headwinds that hurt the banking sector in Europe and the US.

Bank of England Governor Andrew Bailey said he doesn't see a threat to financial stability in the UK as British Banks remain highly flexible with strong capital.

The pound was also boosted by higher UK interest rates with more upcoming rate hikes.

Dollar

The dollar index fell 0.3% on Friday, resuming losses, and almost hitting 13-month lows against a basket of major rivals. 

The dollar is hurt amid ongoing risks surrounding the US banking sector, in turn threatening to send US economy into recession.

US regional banks, including PacWest, First Horizon, and Western Alliance were exposed to extensive losses this week, with Western Alliance looking to sell assets to exit the current financial crisis.

Swiss consumer prices rose 2.6% in April y/y , slowing down from 2.9% in the previous reading, and below estimates of 2.6%.

On a monthly basis, consumer prices were flat last month, while analysts expected a 0.2% rise.

Euro fell in against major rivals on Thursday following the European Central Bank's policy decisions.

European Central Bank President Christine Lagarde said in the post-ECB meeting press conference that inflation outlook remains high in the euro zone.

Thus, the ECB decided to raise interest rates by 25 basis points to 3.75%, the highest since 2008.

Lagarde said everyone agreed on the necessity of rate hikes with more space to cover, making it clear the ECB is preparing for more rate hikes.

Lagarde noted that some members went as far as asking for a 0.5% rate hike this month.

Lagarde also said the decision today was eventually agreed upon unanimously amid a collective aim to combat inflation.

Lagarde said the appropriate neutral levels for ECB monetary policies remain unclear, and will be identified after reaching it naturally.

On trading, EUR/USD fell 0.4% to 1.1016 as of 20:29 GMT. 

The Dollar

The dollar index rose 0.1% as of 20:12 GMT to 101.4, with a session-high at 101.6, and a low at 101.03. 

The Fed

The Federal Reserve announced a 0.25% rate hike to 5.25% this week as expected by market analysts, the highest level since 2007.

However the bank directly hinted at the end of the current cycle of policy tightening.

The Fed raised interest rates 7 times in 2022, during March, May, June, July, September, November, and December.

Fed Chair Jerome Powell asserted the bank will continue to fight inflation to bring it down to the 2% targets, while continuing to monitor economic data to gauge progress.

However, Powell asserted the road remains long to control inflation, with monetary policies requiring time to work effectively.

Data

Earlier US data showed unemployment claims rose to 242 thousand last week, above estimates of 239 thousand.

Now investors await the crucial payrolls report tomorrow to gauge the status of the US labor sector in April.

Loonie

Canadian Dollar rose 0.6% as of 20:30 GMT to 0.7387.

Aussie

Australian dollar rose 0.3% against US counterpart as of 20:30 GMT to 0.6693. 

US stock indices declined on Thursday as markets assess the Federal Reserve's decisions and amid growing concerns about the US banking sector.

Another Bank Struggles

The PacWest Bancorp's stock tumbled 40% on Tuesday after news that the bank is considering strategic options.

According to CNBC, the bank might be sold off, with consultants brought to to assess long-term plans for business according to sources. 

Many stocks for west coast regional banks in the US were hit hard following the collapse of the Silicon Valley Bank in March due to similar client base. 

The market value for the PacWest bank currently stands at $750 million, down 72% so far this year. 

The Fed

The Federal Reserve announced a 0.25% rate hike to 5.25% this week as expected by market analysts, the highest level since 2007.

However the bank directly hinted at the end of the current cycle of policy tightening. 

The Fed raised interest rates 7 times in 2022, during March, May, June, July, September, November, and December. 

Fed Chair Jerome Powell asserted the bank will continue to fight inflation to bring it down to the 2% targets, while continuing to monitor economic data to gauge progress. 

However, Powell asserted the road remains long to control inflation, with monetary policies requiring time to work effectively. 

Data

Earlier US data showed unemployment claims rose to 242 thousand last week, above estimates of 239 thousand.

Now investors await the crucial payrolls report tomorrow to gauge the status of the US labor sector in April.

On trading, Dow Jones fell 0.9% as of 16:19 GMT, or 316 points to 33,098, while S&P 500 shed 0.6%, or 25 points to 4,065, as NASDAQ slid 0.3%, or 37 points to 11,987.