By Harry Robertson
LONDON (Reuters) -The pound jumped to a new 15-month high on Thursday after data showed the British economy shrank by less than expected in May and the dollar dropped on the back of cooling U.S. inflation.
Sterling rose for the sixth straight session and was last up 0.92% at $1.311, after breaking through the $1.31 level for the first time since mid-April 2022. It was on track for its biggest weekly gain since October last year.
The pound was also up against the euro, with the single currency down 0.39% to 85.38 pence. That was not far off the 11-month low of 85.05 pence touched on Tuesday.
Britain’s currency has been on a tear against the dollar in recent days as investors have wagered that the Bank of England will have to keep raising interest rates while the U.S. Federal Reserve is close to stopping.
Expectations of higher interest rates in a country tend to boost its bond yields, making them look more attractive and boost the domestic currency.
The pound had rallied 0.45% on Wednesday as the dollar plunged in the wake of data which showed that U.S. consumer price index (CPI) stood at 3% year-on-year in June, the smallest increase since March 2021.
Data on Thursday showed the British economy contracted 0.1% in May, after growth of 0.2% the previous month. Economists expected a contraction of 0.3%.
“The trigger for all this was yesterday’s U.S. CPI (consumer price index inflation) data that came out, and the fact that this is showing that we may have reached peak (U.S.) rates,” said Michael Owens, senior sales trader at Saxo Global Markets.
On top of that, Owens said, “every bit of data that’s coming out of the UK seems to be not quite as negative as the market was expecting”.
Figures released on Tuesday showed that British wages rose at the joint highest rate on record in the three months to May, keeping the pressure on the BoE.
On Thursday, the British government sought to end months of strikes by offering teachers, doctors and other public sector workers pay increases of 6% and above, but warned it would mean cuts elsewhere.
The dollar index was down 0.53% to 99.96, after dropping 1.07% on Wednesday.
Adding to the slump in the greenback on Thursday was data showing that U.S. producer prices barely rose in June.
“Today’s sterling strength is largely a catch up from yesterday’s underperformance, where the pound failed to pick up the same level of support as other G10 FX currencies as the broad dollar sold off,” said Nicholas Rees, FX market analyst at Monex Europe.
Plenty of market analysts think the pound may have further to rise, despite the lacklustre performance of the British economy.
Deutsche Bank strategists on Wednesday said they expect the dollar to continue to fall and predict that sterling will rise to $1.33 by the second quarter of 2024.
Yet HSBC analysts said in a note to clients that “we would be wary of chasing more powerful moves higher in the currency without a significant improvement in the domestic story”.
(Reporting by Harry Robertson; Editing by Kim Coghill and Toby Chopra)
