The pound sterling soared to its highest level against the US dollar in a year on Wednesday, reaching above $1.30 for the first time since July 2023. This notable surge follows increased investor confidence that UK interest rates will remain elevated for an extended period.
The recent data revealed that UK inflation is proving more persistent than anticipated by some analysts. This insight has led traders to adjust their expectations regarding a potential rate cut in August, contributing to the pound’s significant gain.
Market expectations have also been buoyed by hopes that the new Labour government will bring economic stability to the UK. Higher interest rates typically enhance the pound’s value as they attract greater overseas investment, increasing demand for sterling and driving up its value relative to other currencies.
The recent inflation data indicated that while the headline inflation rate for June held steady at 2%, in line with the Bank of England’s target, underlying inflationary pressures remain stubbornly high. Specifically, inflation in the services sector was steady at 5.7%, and core inflation, excluding volatile items like energy prices, remained at 3.5%.
In contrast to the UK’s situation, several central banks, including those in Switzerland, Sweden, and Canada, have already reduced their rates. However, both the Bank of England and the US Federal Reserve have yet to follow suit.
The International Monetary Fund (IMF) recently upgraded its forecast for UK economic growth to 0.7% for the current year, up from 0.5% in April’s global forecasts. Despite this positive adjustment, the IMF cautioned that persistent inflation could necessitate maintaining higher interest rates for a longer period.
Kit Juckes, Head of FX Strategy at Societe Generale, expressed skepticism about the sustainability of the pound’s rally but acknowledged the current global uncertainties. He noted that the stability offered by the new UK government is contributing positively to the pound’s performance.
Global market concerns have been heightened by recent political developments, including a hung parliament in France and turmoil in the US presidential race, which saw an attempted assassination of Republican candidate Donald Trump and questions surrounding President Joe Biden’s future.
In a related development, King Charles has outlined Prime Minister Keir Starmer’s economic revival plans, focusing on new housing and infrastructure projects. Emma Wall, Head of Investment Analysis at Hargreaves Lansdown, commented on the pound’s bounce, attributing it to inflation being at target, alongside ambitious reform plans and a high-growth agenda detailed in the King’s Speech.
