(qlmbusinessnews.com Thurs. 18th July, 2024) London, UK —
New Government and Inflation Data Boost Pound to Yearly High Against Dollar
The pound surged to its highest level against the dollar in a year on Wednesday as investors speculated that UK interest rates would remain elevated for an extended period.
Recent data revealed that inflation was proving more persistent than some analysts had anticipated. This led traders to reduce expectations of a rate cut in August, propelling the pound above $1.30 for the first time since July of last year.
The pound's rise has also been supported by market optimism that the new Labour government will bring economic stability.
Higher interest rates in the UK increase the value of the pound because they attract more foreign investment, thus boosting demand for sterling and raising its value relative to other currencies.
Currency markets have reacted by betting that UK rates will stay higher for longer.
In June, UK inflation remained steady, with the headline rate aligning with the Bank of England's target of 2%. However, certain underlying measures of inflation, closely monitored by the Bank's policymakers, remain stubbornly high. For instance, inflation in the services sector stayed at 5.7% in June, while core inflation, excluding volatile items like energy prices, held at 3.5%.
While central banks in countries such as Switzerland, Sweden, and Canada have already reduced rates, the Bank of England and the US Federal Reserve have yet to follow suit.
On Tuesday, the International Monetary Fund (IMF) raised its forecast for UK economic growth to 0.7% this year, up from 0.5% in its April global forecast. However, the IMF cautioned that the UK was experiencing persistent inflation, which might necessitate keeping interest rates “higher for even longer.”
Kit Juckes, head of FX Strategy at Société Générale, expressed doubts about the longevity of the pound's rally. However, he acknowledged that “there's so much uncertainty in the world,” and the stability provided by a new UK government was supporting the pound.
Political instability elsewhere, including a hung parliament in France and turmoil in the US presidential race following an assassination attempt on Republican candidate Donald Trump and concerns about President Joe Biden's capacity for another term, has further unsettled global markets.
On Wednesday, King Charles outlined Prime Minister Keir Starmer's plans to revitalise the economy, focusing on delivering new homes and infrastructure projects.
Emma Wall, head of investment analysis and research at Hargreaves Lansdown, commented: “Inflation at target – and marginally down if you care about decimal places – coupled with a King's Speech full of ambitious reforms and a high growth agenda has caused the pound to bounce.”
She added that the key to sustaining the rally would be forthcoming economic data and the Bank of England’s interest rate decision, scheduled for 1 August.
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