Pound rallies as traders bet on interest rate hike 


Pound rallies to its highest level against the dollar for more than year as traders bet on interest rate hike

The pound rallied to its highest level against the dollar for more than a year yesterday as traders bet on a Bank of England interest rate hike.

Sterling also hit its highest level versus the euro so far this year amid market expectations that the 0.25 percentage point increase will not be the last.

The UK currency was given a further boost against the dollar by figures showing a fall in US inflation to 4.9 per cent, which is the first time that it has been below 5 per cent in two years.

This appeared to bolster the chances that the US Federal Reserve is preparing to pause its aggressive cycle of interest rate increases. 

The UK, in contrast, looks likely to face a further dose of hikes as inflation, for now, remains stubbornly high at more than 10 per cent.

Pound rallies: Sterling climbed to as high as $1.2679 versus the dollar in the wake of the latest US inflation data - its highest level since April 2022 - though the rally later ran out of steam

Pound rallies: Sterling climbed to as high as $1.2679 versus the dollar in the wake of the latest US inflation data – its highest level since April 2022 – though the rally later ran out of steam

The Bank of England is widely expected to hike rates from 4.25 per cent to 4.5 per cent today with a further quarter-point rise also looking likely next month.

That could mean UK interest rate-setters parting ways with their counterparts in Washington if the Federal Reserve does take a break from hiking its rate.

Sterling yesterday climbed to as high as $1.2679 versus the dollar in the wake of the US inflation data – its highest level since April 2022 – though the rally later ran out of steam.

The pound’s prospects have been looking brighter over recent months as it recovers from a record low of just over $1.03 last autumn, when it suffered a sell-off following Kwasi Kwarteng’s disastrous mini-Budget.

It has been helped by a UK economic performance which, while lacklustre, has defied doom-laden recession forecasts.

This has brought a dramatic change of tone from some experts who were previously bearish on the pound.

Analysts at US investment bank Citi this week said that they expect sterling to hit $1.30 versus the dollar.

They had previously predicted that the pound faced a slide towards parity.

But Vasileios Gkionakis, the head of European foreign exchange at Citi, said: ‘We have been wrong, plain and simple.’

On Friday, Goldman Sachs said that it was now ‘constructive’ on the pound.

However, Deutsche Bank strategist Shreyas Gopal took a different view in a note yesterday, arguing that the rally looked likely to have run out of steam.

‘Having been bullish on the pound since the start of the year, we no longer think the pound presents attractive risk-reward in the short term,’ he said.



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