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Sterling hit its highest level against the dollar since March 2022 on Tuesday as investors braced for the US Federal Reserve to start cutting interest rates faster than the UK central bank.
The pound rose as much as 0.4% to $1.3246 after leading central banks gave mixed outlooks for the interest rate in the United States and the United Kingdom late last week. The pound later fell back to trade up 0.3 percent at $132.28, but the gain puts the currency on track for its best monthly performance against the dollar since November.
At a conference in the US, Fed chairman Jay Powell said it was “time” to cut US interest rates, but Andrew Bailey, governor of the Bank of England, warned it was “too early to declare victory”. inflation in the UK.
“The stark contrast between Powell’s green light for a rate cut and Bailey’s more cautious stance at Jackson Hole is a good summary of what is supporting sterling’s strength,” said Kyle Chapman, a foreign exchange analyst at currency broker Ballinger Group, referring to last week’s summit in the United States.
The pound has been supported by stronger-than-expected economic data in recent months and optimism that the new Labour government will usher in a period of political stability and growth-boosting planning reforms.
UK private sector activity grew faster than expected in August, the fastest pace in four months. Economic growth of 0.6 per cent in the second quarter was also “well above” market expectations, according to Derek Halpenny, head of research at MUFG.
However, services inflation, which the BoE closely watches for signs of underlying price pressures, remained stubbornly above 5 percent. Britain’s annual wage growth also “does not indicate any urgency to support easing,” said Geoff Yu, a foreign exchange strategist at BNY.
UK wage growth slows fell to a near two-year low of 5.4 percent in the three months to June, but the unemployment rate unexpectedly fell, signaling the resilience of the labor market.
The uncertain outlook for the UK economy divided BoE policymakers as they delivered their first interest rate cut in more than four years in early August. Traders are betting on a one percentage point cut from the BoE by the middle of next year.
By contrast, investors expect the Fed to deliver seven or eight rate cuts of 0.25 percentage points each by the middle of next year, while traders are divided on whether the first cut next month will be 0.25 or half a percentage point.
Bailey delivered some encouraging news on the UK inflation outlook on Friday as the impact of the second wave of inflation “appears to be smaller than expected”.
Analysts said U.S. payrolls data due in early September will be crucial for the dollar’s performance, as a weak report could prompt traders to bet on a hard U.S. landing and a faster rate cut by the Fed.
“Bailey’s speech had a lot to suggest the BoE is becoming more optimistic and less concerned about persistent inflation… but after Powell’s speech, it looks like he’s taking a hard line and hinting at a potential divergence going forward,” said MUFG’s Halpenny.
