Pound hits $1.30 for first time in a year as inflation dampens rate cut hopes

The pound rose above $1.30 for the first time in a year yesterday as higher-than-expected inflation figures dashed hopes of rate cuts.

And against the euro, the rate rose to above €1.19, its highest level in almost two years, providing a boost to British holidaymakers.

Elsewhere, markets were captivated by interest rate developments across the Atlantic, while hopes for a cut by the US Federal Reserve increased.

As a result, the gold price has risen to $2,483 per ounce, a new record.

In Britain, official figures showed inflation held steady at 2 percent in June, the Bank of England’s target.

But economists had expected inflation to fall to 1.9 percent. And the measure of services inflation, an underlying gauge closely watched by the Bank of England, remained at a stubbornly high 5.7 percent.

That prompted traders to lower their expectations for a rate hike in the summer.

Market prices suggested a 50/50 chance of a rate cut in August, but that chance fell to just over one in three.

The stubbornness of inflation was partly attributed to the ‘Taylor Swift’ effect. The Office for National Statistics (ONS) figures showed that a rise in hotel prices was putting the biggest upward pressure on inflation.

Economists suspected this was because fans booked rooms in London, Edinburgh, Liverpool and Cardiff for the American singer’s Eras tour.

However, experts said there was still not enough evidence to justify a cut when UK rate-setters meet again in two weeks.

Rob Wood, chief UK economist at Pantheon Macroeconomics, said the “huge scale” of services inflation, compared with the Bank of England’s expectations of it now close to 5 percent, would leave “rate-setters in the dark” about the direction it would take.

“It is harder to argue that interest rates should be cut when services inflation did not ease in June and has barely eased since February,” Wood said.

Sandra Horsfield, economist at Investec, said: “Combine that with the positive surprise in GDP growth in May, and it looks increasingly unlikely that the Bank of England can join the growing number of central banks in an easing cycle.”

The European Central Bank has cut interest rates and speculation is mounting that the U.S. Federal Reserve could do the same in September. That has sent gold prices soaring, which tend to rise when interest rates fall.

The moment for a US rate cut is “getting closer”, according to Fed Governor Christopher Waller, echoing the sentiment expressed by US central bank chief Jerome Powell this week, who said inflation figures are bolstering confidence in a downward trend.

“With interest rate cuts back on the table, demand for gold has picked up again,” said Daniela Sabin Hathorn, an analyst at Capital.

Gold does not provide investors with a return like other assets, such as stock dividends or bond coupons.

This means that there is an ‘opportunity cost’ associated with holding a stock when the money invested could be more useful elsewhere.

Those costs will fall as interest rates fall, making gold more attractive.

“This, combined with slowing economic growth in the near future, is expected to push gold prices higher,” said Sabin Hathorn.