The pound is rising to its highest level against the dollar in more than a year as traders bet on a rate hike
The pound rose to its highest level against the dollar in more than a year yesterday as traders bet on a rate hike by the Bank of England.
Sterling also hit its highest level against the euro yet this year, with the market expecting the 0.25 percentage point gain won’t be the last.
The British currency was given further impetus against the dollar by data showing a drop in US inflation to 4.9 percent, marking the first time in two years that it has dipped below 5 percent.
This seemed to increase the likelihood that the US Federal Reserve will prepare to interrupt its aggressive cycle of rate hikes.
The UK, on the other hand, looks likely to face a further dose of hikes as inflation remains stubbornly high at above 10% for now.
Pound rallies: Sterling climbed to $1.2679 against the dollar in the wake of the latest US inflation data – the highest level since April 2022 – though the rally later picked up steam
The Bank of England is widely expected to raise rates from 4.25% to 4.5% today, with a further quarter-point rise next month looking likely.
That could mean UK rate setters say goodbye to their Washington counterparts if the Federal Reserve takes a break from raising rates.
Sterling climbed to $1.2679 against the dollar yesterday in the wake of US inflation data — its highest level since April 2022 — though the rally picked up steam later.
The outlook for the pound has looked brighter in recent months as it bounced back from a record low of just over $1.03 last fall when it suffered a sell-off following Kwasi Kwarteng’s disastrous mini-Budget.
It was helped by the economic performance in the UK which, while subdued, has defied gloomy recession forecasts.
This has led to a dramatic change of tone among some pundits who had previously been bearish on the pound.
Analysts at US investment bank Citi said this week they expect sterling to hit $1.30 against the dollar.
They had previously predicted that the pound would slide towards parity.
But Vasileios Gkionakis, Citi’s head of European foreign exchange, said: “We were wrong, it’s as simple as that.”
On Friday, Goldman Sachs said it was now “constructive” for the pound.
However, Deutsche Bank strategist Shreyas Gopal took a different view in a note yesterday, arguing that the rally likely appeared to have picked up steam.
“Because we have been bullish on the pound since the start of the year, we no longer think the pound offers an attractive risk-return ratio in the near term,” he said.