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The British pound fell record low Last time investors rebelled against former Prime Minister Liz Truss’s budget plans. Now, it is enjoying a comeback.
Sterling rose to its highest level against the US dollar in 10 months on Tuesday, rising above $1.25 for the first time since June 2022. The pound, which has advanced about 3.3% against the greenback since the start of 2023, is the best-performing currency of developed economies this year.
Britain’s currency got a boost from signs that the country’s economy is doing better than expected. Activity is now believed to have increased by 0.1% in the last three months of last year, up from the previous estimate of no growth at all. Gross domestic product growth is estimated at 0.3% in January after a 0.5% decline in December.
This flexibility is bolstering expectations that the Bank of England will maintain aggressive interest rate hikes despite concerns about the health of the global banking sector. Rising rates can boost the domestic currency as they help attract foreign investors looking for higher returns.
Inflation in United Kingdom also Reached an annual rate of 10.4% in FebruaryStresses the need for the Bank of England to maintain its accommodative stance.
The pound fell to near $1.03 in September 2022 after the Truss government unveiled plans to boost borrowing while cutting taxes, sparking jitters in financial markets that raised fears of a recession in the United Kingdom.
The International Monetary Fund predicted in January that Britain’s economy would shrink by 0.6% this year, while all other advanced economies would grow, albeit slightly.
“There was a lot of pessimism in the price of the pound,” said Francesco Pesolle, currency strategist at ING.
But a sharp decline in energy prices and China’s reopening have provided some comfort about the economic outlook since the beginning of the year.
“There was a major rerating of growth expectations across Europe and that impacted Britain,” Pesolle said.
The euro has also been lifted by these dynamics, rising 2.3% against the US dollar in 2023. According to Pesolle, the pound’s rally has been bullish largely because its 2022 decline was more severe.
Both currencies have been helped by the greenback’s sharp decline from highs reached last September as fears of a recession loomed large in the United States.
A lack of clarity over the Federal Reserve’s next steps has also weighed on the dollar in recent weeks. Investor speculation has increased that the Fed may pause or stop raising rates due to concerns about the economy following the failure of Silicon Valley Bank last month.
Jordan Rochester, currency strategist at Nomura, said he thinks the pound could rise to $1.30 and “potentially higher” this year. But he still sees risks given uncertainty over the Bank of England’s plans and what effect the rate hike will have on the country’s economy. And Pesolle cautioned that currency fluctuations often become very high when markets are volatile, as they are now.
“Moves become more intense in a volatile market environment,” he said.