Pound hits new high above $1.31 after UK economy contracted less than expected
The pound reached a new 15-month high above $1.31 yesterday after the UK economy contracted less than expected.
Sterling rose to $1.3114 – a level not seen since last April – against a generally weaker dollar.
The rally came after official data showed the UK economy contracted 0.1 percent in May as three public holidays, including one for the coronation, took their toll.
Rally: The pound hit a new 15-month high above $1.31 after data showed the UK economy contracted 0.1% in May as three bank holidays took their toll
However, the decline was not as sharp as feared, suggesting that the economy is holding up despite high inflation and rising interest rates.
The British currency has appreciated against the dollar as investors have bet that the Bank of England will have to keep raising interest rates while the US Federal Reserve is about to shut down.
The Bank looks set to raise interest rates from 5 percent to 5.5 percent next month, and investors are betting they will cross 6 percent by the end of the year.
Expectations of higher interest rates in a country tend to raise bond yields, making them look more attractive, and boost domestic currencies.
But while inflation in the UK remains stubbornly high at 8.7 per cent – more than four times the 2 per cent target – figures from this week showed US inflation has fallen to 3 per cent.
Michael Owens, senior sales trader at Saxo Global Markets, said the fall in US inflation suggests that “we may have hit the peak in US interest rates,” which dents the dollar.
Moreover, Owens added that “every bit of data coming out of the UK doesn’t appear to be as negative as the market expected.”