The pound rose to its highest value against the dollar since almost a full year after the UK’s economy grew faster than expected in May, while US inflation was lower than forecast. This led to a general decline in the greenback.
The pound reached a high of $1.2947 – the highest since July 2023 – and then traded up 0.5 percent at $1.2907, after data revealed that the UK economy had grown by 0.4 percent, after having stagnated in April. The data is a boost for the new Labour government which has made growth its “national goal”.
A broader drop in the dollar also helped boost the British currency after US Inflation was below expectations at 3 percent in June. The dollar fell by 0.6% against a basket made up of six currencies.
Lee Hardman is a currency analyst with MUFG. He said, “The pound’s strength has been bolstered by new evidence that shows the UK economy recovering faster than expected.”
The traders on swaps markets have now split evenly over the probability of a Bank of England interest rate cut in March. They had priced in a two thirds probability earlier this week before BoE Chief Economist Huw Pill said he wasn’t yet ready to switch his vote.
The strength of the pound sterling comes during the first week under a Labour government. Investors have welcomed this new era in relative political stability.
The chancellor Rachel Reeves has made a series of far-reaching reforms on the planning front to “fix Britain’s foundations” and “get Britain back building”.
Shahab Jalinoos is the global head of Foreign Exchange Research at UBS Investment Bank.
He said that now the UK has “arguably the most stabile government in the G7 for the next five-year period”, and sterling should “finally see the tides of structural flows moving in its favor for the first time since the post-Brexit vote era”.
The pound has gained strength after the French snap elections spooked investors. This resulted in an unresolved parliament, which has put pressure on the euro.
The Investment Institute at BlackRock, the world’s biggest asset manager, changed its tactical stance on UK stocks this week from “neutral to “overweight”, in the belief “political stabilization and an improvement in growth could improve investor confidence”.
Michael Metcalfe is the head of macro strategy for State Street, the largest custodian bank in the world. He said that recent positive developments had led asset managers to eliminate underweightings of the UK currency during the quarter. Neutral positioning leaves “plenty room” for sterling to strengthen further.
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