The pound has reached its highest level versus the dollar since April 20, 22. This is due to strong economic data which has increased pressure on the Bank of England.
The pound rose by up to 0.8 percent on Wednesday, to $1.2698. This was helped by the broad retreat of the dollar because markets were expecting the US Federal Reserve not to tighten its monetary policy.
The UK currency rose by 0.16 percent against the euro, reaching €1.1705, which was its highest level in August last year before falling to €1.1693.
The rise in sterling is a result of a major revision by the markets about their outlook for UK interest rate. The markets are now pricing a peak rate of 5.71 percent by the end the year. This is up from the 5.35 percent earlier this month and the current level of 4.5%. Official figures released this week show that the UK economy grewin its first three months this year, contrary to previous predictions. In the meantime, private sector wages were 7.6 percent higher in April than they had been a year ago, which is the fastest rate of growth outside of the coronavirus era.
Jane Foley is a senior foreign exchange strategist with Rabobank. She said, “The market tends to overreact but it’s very clear that the UK has a much more stubborn inflationary problem than other countries.”
She said: “We revised our GBP Forecast modestly higher due to the increase in gilt yields as expectations of a tighter UK monetary Policy take hold.”
Andrew Bailey, Governor of the BoE, stated on Tuesday that was taking “a lot longer” than expected for inflation to be controlled.
The UK government’s debt was sold off on Tuesday, pushing yields to levels last seen in Kwasi Kwarteng’s “mini” budget of last autumn. This included PS45bn worth of unfunded tax reductions.
The yield on UK 2-year debt is currently at 4.8%, down from a high of 4.64 percent last autumn. The yields on longer-term gilts have not risen above the levels of last autumn.
The pound was also boosted by the broader dollar weakness as the Federal Reserve is likely to stop its aggressive rate-raising campaign this Wednesday. This has led investors to reduce expectations for a further increase in July.
Kit Juckes is a currency analyst at Societe Generale. “I’m having a problem with that. If you believe monetary policy has long and variable delays of several months, how can the Fed stop for a month and take stock to see where we are?” Kit Juckes said. It doesn’t make any sense.
Juckes believes sterling will reach a high of $1.28 against the dollar.
He added, however, that the pound was likely at its peak against the euro. To get sterling to beat the euro, you must sincerely believe that policy rates will be 1 percent higher before Christmas.
We have many people with mortgages which need to be fixed at levels people will not be able cope with before that date.
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