Sterling has recorded a strong start to November as traders grow increasingly confident that the US Federal Reserve has reached the peak of its rate-hike cycle.Thank you for reading this post, don't forget to subscribe!
The pound was trading 0.11 percent higher against the dollar, reaching $1.2390 around market close. Earlier in the day it had hit just under $1.2400 – its highest level since mid-September.
The rise for sterling, which has risen from around $1.2150 in early November, comes as investors expect the Fed to start cutting rates earlier than expected.
“The outlook for GBP/USD has improved significantly due to the combination of USD weakness since early November and not as bad as UK economic data,” said Fiona Cincotta, senior financial markets analyst at City Index.
Recent data shows that weakness is emerging in the US labor market, which suggests that the Fed’s rate hikes are beginning to have an impact. A survey of the manufacturing sector has also pointed towards a slowdown.
Meanwhile, the Bank of England has stressed that it will not cut interest rates any time soon as inflation continues to remain above target.
Higher interest rates attract foreign investment and increase the value of the domestic currency.
Traders will keep a close eye on future updates on the state of the UK economy to see if it is faltering under the pressure of higher borrowing costs.
Cincotta added, “To sustain last week’s gains and meaningfully rise above the $1.24 handle, we will need more data to show that the decline in the UK economy has eased and more evidence That the American economy is cooling.”
City economists expect Britain’s GDP to shrink in the third quarter and a winter recession looks a real possibility. The recession would encourage the Bank of England to start cutting rates earlier than planned, which would hinder further improvement in the sterling exchange rate.