The pound climbed to $1.30 for the first time in more than a year as the UK’s widening interest—rate advantage over its developed peers in the G-10 lures investors, even as risks of economic damage grow.
(Bloomberg) — The pound climbed to $1.30 for the first time in more than a year as the UK’s widening interest—rate advantage over its developed peers in the G-10 lures investors, even as risks of economic damage grow.
Data this week added to evidence the Bank of England’s most aggressive run of interest rate hikes in a generation has failed to tame inflation. The pound strengthened to as high as $1.3000 on Wednesday, a level last seen in April 2022, after a better-than-forecast US inflation print curbed appetite for the US currency.
Until higher funding costs make a painful UK contraction imminent, currency traders will continue to pile into sterling. Returns on pound-denominated assets are hard to resist compared with other developed nations.
“The pound should continue to benefit from higher UK rates in the near-term until evidence begins to emerge that the UK economy is slowing more in response to much higher rates,” MUFG strategists wrote in a note. They said they see the currency pushing further into “the low 1.30s” in the near term.
The 1.30 threshold carries a lot of political and emotional weight for the pound, which has largely traded below that level since the UK voted to leave the European Union in June 2016.
Money-market pricing shows traders expect the BOE to raise rates by another 145 basis points by March, taking the UK’s base rate to 6.5%. To compare: peak-rate predictions are around 4% for the euro zone and 5.5% for the US.
That divergence has underpinned a sharp turnaround. In September the pound hit its lowest level on record — $1.0350 — as markets spurned then Prime Minister Liz Truss’s budget plans.
Wednesday’s move takes the pound’s rally to about 7% against the dollar since the start of the year — the best showing in the G-10.
It’s unclear how long sterling’s run will last. Rate differentials are on its side for now, but strategists warn that the rumblings of a damaged economy will eventually force a rethink.
And while the pound has posted gains so far this year, Brexit has set the currency on a downward path. Its average in the five years before the 2016 vote was roughly $1.59. And in the five years before that, around $1.76.
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