London
CNN
—
The pound hit a record low last autumn as investors rebelled against former prime minister Liz Truss’s budget plans. Now it is enjoying renewed strength.
The pound hit its highest level against the U.S. dollar in 10 months on Tuesday, surpassing $1.25 for the first time since June 2022. The pound, which has gained about 3.3% against the greenback since the start of 2023, is the best-performing currency among developed economies this year.
The British currency was boosted by signs that the country’s economy is performing better than expected. Economic activity is estimated to have grown by 0.1% in the last three months of last year, compared with a previous estimate of no growth. Gross domestic product growth in January was estimated at 0.3% after falling 0.5% in December.
This resilience reinforces expectations that the Bank of England will keep interest rates high, despite concerns about the health of the global banking sector. Rising rates can boost the domestic currency as they help attract foreign investors seeking higher yields.
UK inflation also jumped to an annual rate of 10.4% in February, underlining the need for the Bank of England to maintain its strict approach.
The pound plunged to near $1.03 in September 2022 after the Truss government unveiled plans to boost borrowing while cutting taxes, triggering a panic in financial markets that fueled fears of a UK recession.
The International Monetary Fund predicted in January that the UK economy would contract by 0.6% this year, while all other advanced economies would grow, albeit slightly.
“There was a lot of pessimism in pound prices,” said Francesco Pesole, currency strategist at ING.
But the sharp drop in energy prices and the reopening of China’s economy have brought some relief to the economic outlook since the start of the year.
“There has been a significant reassessment of growth expectations in Europe, and that has had an impact on the UK,” Pesole said.
The euro was also supported by this momentum, rising 2.3% against the US dollar in 2023. The pound’s rise was more pronounced largely because its 2022 declines were more severe, according to Pesole.
Both currencies were helped by the greenback’s sharp decline from its peaks last September as recession fears intensified in the United States.
Lack of clarity over the Federal Reserve’s next steps has also weighed on the dollar in recent weeks. Investors have increasingly speculated that the Fed could suspend or halt rate hikes amid concerns about the economy following the collapse of Silicon Valley Bank last month.
Jordan Rochester, a currency strategist at Nomura, says sterling could rise to $1.30 this year and “potentially higher.” But he still sees risks given the uncertainty surrounding the Bank of England’s plans and how rate hikes will play out in the country’s economy. And Pesole warns that currency swings are often exaggerated when markets are choppy, as they are now.
“In a volatile market environment, the moves are exacerbated,” he said.
cnn
