London
CNN
—
Sterling collapsed to a record low last fall as investors rebelled against former Prime Minister Liz Truss’s budget plans. Today, he is making a comeback.
The British pound rose to 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 rose about 3.3% against the note green since the start of 2023, is the best performing currency among currencies. developed economies this year.
The British currency was boosted by indications that the country’s economy is holding up better than expected. Activity is now estimated to have increased by 0.1% in the final three months of last year, compared to a previous estimate of no growth. Gross domestic product growth in January was estimated at 0.3% after a decline of 0.5% in December.
This resilience reinforces expectations that the Bank of England will maintain aggressive interest rate hikes despite concerns about the health of the global banking sector. Rising rates can boost the domestic currency because it helps attract foreign investors looking for higher returns.
Inflation in the UK also jumped to an annual rate of 10.4% in February, underscoring the need for the Bank of England to maintain its tough stance.
Sterling plunged almost $1.03 in September 2022 after the Truss government unveiled plans to boost borrowing while cutting taxes, triggering panic in financial markets that fueled fears of a recession UK.
The International Monetary Fund predicted in January that Britain’s economy would contract by 0.6% this year, while all other advanced economies would grow, if only marginally.
“There was a lot of pessimism in sterling prices,” said Francesco Pesole, currency strategist at ING.
But the sharp decline in energy prices and China’s reopening have brought some relief to the economic outlook since the start of the year.
“There has been a strong reassessment of growth expectations in Europe, and this has had an impact on the UK,” Pesole said.
The euro has also been buoyed by this dynamic, rising 2.3% against the US dollar in 2023. Sterling’s rise has been stronger largely because its 2022 declines have been more severe, according to Pesole.
Both currencies were supported by the greenback’s sharp decline from the highs reached last September as recession fears spread to the United States.
The lack of clarity on the Federal Reserve’s next steps has also held back the dollar in recent weeks. Investor speculation has grown that the Fed may suspend or halt rate hikes due to concerns about the economy following the collapse of Silicon Valley Bank last month.
Jordan Rochester, currency strategist at Nomura, said he believed sterling could reach $1.30 this year and “potentially higher”. But he still sees risks given the uncertainty around the Bank of England’s plans and how rate rises will impact the country’s economy. And Pesole warned that currency fluctuations are often exaggerated when markets are unstable, as is the case now.
“In a volatile market environment, movements are exacerbated,” he said.