Due to a steadily improving British economic outlook, the pound will continue its reign as the best-performing major currency in the world.
Sterling reached an 11-month high at $1.25 per dollar last week. This caps a run where it has outperformed its peers thus far in 2023, with an overall increase of 3.5 percent.
After economic data dispelled fears of a deep recession, investors have piled in to the pound. Since hitting an all-time low at $1.08 last September, it has strengthened by 15% against the dollar.
According to Shreyas, a strategist at Deutsche Bank, the streak will continue in the months ahead as investors reduce their bets against sterling made at the “overly gloomy end” of last year. Sterling will strengthen further, as it is “well placed to be among the relative winners in a downturn in the dollar”, he said.
Nomura suggested that the pound could hit $1.30, the highest level since the surge in energy prices caused by the war in Ukraine.
Sterling is seeing a rise in interest rates from the Bank of England over the next few months. At the same time, the US Federal Reserve is poised to end its monetary tightening after a more than one year. Investors can make higher returns by purchasing the pound and selling dollars, which boosts the currency’s interest rate differential.
Ratesetters at Bank of England will be able to benefit from a stronger currency. The exchange rate can reduce inflationary pressures and make imported goods more affordable. Catherine Mann, an outside member of the Bank’s ratesetting monetary policies committee, stated last year that she voted for large rate increases because a weak currency was driving up inflation.
Some analysts warn that optimism about sterling may be too optimistic. Skylar Koning is senior global strategist at TS Lombard and said that the pound’s recovery this year was remarkable, given the weak prospects of economic growth. She said: “The pound has managed outperform an economy that’s still in a poor condition and a central banking that has kept a fairly doveish bias.”
Wall Street was afflicted by the latest employment data, prompting fears that the Federal Reserve would raise interest rates next month (Callum Jones writes).
Friday’s non-farm payrolls report showed more robust job growth. Equity markets closed. The indices began the day in red, but then started a slow climb back to positive territory.
The Dow Jones industrial average closed at 33,586.52, an increase of 101.23 points or 0.3%. Meanwhile, the S&P 500 saw a gain in value of 4.09 points or 0.1 percent to 4,109.11.