In a significant turn of events, the pound has surged to a two-year high following the Bank of England’s recent decision to maintain interest rates.
- Sterling rose by 0.7% against the dollar, reaching $1.331.
- The currency also climbed 0.3% against the euro, marking its strongest value since July.
- Market analysts foresee further gains for the pound, though economic uncertainties remain.
- Concerns persist regarding the UK’s economic outlook despite short-term gains in currency value.
Following the Bank of England’s decision to keep interest rates steady, sterling saw a remarkable increase of 0.7% against the dollar, reaching $1.331. The pound also gained 0.3% against the euro, achieving its strongest level since July. This surge was influenced by the US Federal Reserve’s unexpected half-point rate cut earlier in the week. High interest rates typically enhance a currency’s value by attracting investors seeking superior returns.
Despite the slower pace of rate cuts in the UK compared to the US and the Eurozone, the market expects the Bank of England to execute one more rate cut in November, keeping the pound competitive. Nomura analysts forecast that sterling could reach $1.35, a level not observed since January 2022. “Although inflation has fallen to 2.2%, close to the Bank’s 2% target, the Monetary Policy Committee (MPC) indicated a gradual removal of policy restraint, predicting inflation will rise to 2.5% by the year’s end.“
The decision to pause rate cuts weighed negatively on UK government bonds, causing 10-year gilt yields to increase by four basis points to 3.88%. Concurrently, the FTSE 100 and FTSE 250 indices experienced a rally, closing up 0.9% and 1.6% respectively. This market optimism reflects investor confidence in the stability provided by the Bank’s cautious approach.
However, there are voices of caution in the market. Nick Andrews, senior FX strategist at HSBC, warned that sterling’s recent gains might be short-lived. He argued that the pound could weaken if the Bank of England is compelled to implement more aggressive rate cuts than currently anticipated. Andrews stated, “The outlook for the UK economy is likely to weaken relative to the US, which will weigh on the pound/dollar.”
The pound’s recent gains highlight a complex economic landscape, with potential for short-term strength but considerable long-term uncertainties.
