Sterling has surged to a one-year high against the dollar, reaching $1.29 this afternoon.
This increase follows unexpectedly strong UK economic growth in May, dampening expectations of an August rate cut. Simultaneously, lower-than-expected US inflation has weakened the dollar.
Kathleen Brooks, research director at XTB, commented, “The pound has been a big winner this week and is now less than 75 points away from $1.30, a key psychological level.
“The pound has been one of the best performers since the start of this year. However, the gains have been turbocharged this month, with GBP/USD up 1.22% since the UK election on July 4, and EUR/GBP down nearly 0.6%.
“Multiple drivers are strengthening the pound right now, and these factors may continue to exert upward pressure in the medium term.”
Ms. Brooks noted that traders’ belief in a higher likelihood of quick rate cuts in the US compared to the UK has bolstered enthusiasm for the pound. Additionally, the UK’s improved growth outlook in recent months has increased market confidence in the British economy.
The Office for National Statistics reported a 0.4% increase in economic output in May, following zero growth in April, exceeding the 0.2% monthly increase predicted by a Reuters poll of economists.
The strength of this growth could deter the Bank of England from cutting interest rates as soon as August 1, its next scheduled monetary policy announcement date. Three policymakers highlighted the strength of domestic price pressures this week.
The likelihood of an August rate cut fell below 50% in the futures markets, down from just above 50% on Wednesday.
Shahab Jalinoos, global head of FX research at UBS Investment Bank in New York, stated, “The UK now arguably has the most stable government in the G7 over the next five years, due to the size of the majority. We believe the [pound] should finally see the tide of structural flows move in its favour for the first time in the post-Brexit-vote era.”
