Sterling fell sharply against the dollar on Wednesday as the Bank of England eased pressure to raise interest rates.
The pound fell as much as 1.5 percent to $1.198. This level was last seen in January. These moves were made after data showed that the UK’s inflation rate fell to 10.1 percent in January, compared with 10.5 percent the month before. Reuters polled economists and forecast a fall to 10.3 percent.
Investors are increasingly convinced that the BoE may be about to stop its monetary tightening cycle. This comes as strong US economic data fuels bets on the Federal Reserve needing to rein in inflation.
Jordan Rochester, Nomura’s foreign exchange strategist, said that there seems to be a gap between the US and UK. The US inflation was hot. However, the UK may be experiencing inflation that is lower than expected due to consumers cutting back on spending.Contrary to the UK, US inflation rose higher than expected in January. Consumer prices rose at an annual rate 6.4%, compared with a forecast of 6.2%. As a result, the dollar strengthened while futures markets valued in a higher peak rate.
The world’s defacto reserve currency has fallen 8.8% over the past four-and-a-half months, but has rallied in February after a strong run of US economic data.
The BoE increased rates by half a point to 4% earlier this month, but it hinted that it might not be the last.
Analysts at MUFG believe that a combination of a “dovish shift of policy guidance from BoE” as well as a “hawkish repricing Fed policy” have weighed down the pound.
London’s FTSE 100 stock index reached 8,000 points on Wednesday thanks to the fall in sterling. Multinational companies that earn large amounts of their revenue abroad tend to be a part of the index’s benefits when the UK currency falls.
Sterling’s latest drop still places it well above the all time low of $1.04 in September, during the height of the gilts crises. This was when ex-prime minister Liz Truss’s borrowing plans and a crisis within the pensions sector eroded investor confidence in Britain.