British pound rises to highest level against dollar since April 2022, further rate increases expected

British sterling, boosted by strong economic data, has risen to its highest level against the dollar since April last year, putting additional pressure on the Bank of England to continue raising interest rates.

The pound rose by as much as 0.8 percent to $1.2698 on Wednesday, aided by a broad retreat of the dollar as markets anticipated that the U.S. central bank would halt rate increases.

The currency also rose by 0.16 percent against the euro to €1.1705, the highest level since August last year, before retreating to €1.1693. The sharp rise in the pound comes at a time when markets are seriously reassessing the outlook for British interest rates, which are currently at 4.5 percent.

Official data released this week shows that the British economy grew in the first three months of this year, despite previous recession forecasts. Meanwhile, average wages in the private sector in the first three months of this year were 7.6 percent higher than in the same period last year, the fastest growth rate recorded outside the coronavirus pandemic period.

Peak against the euro

– We have revised our forecast for the British currency upwards due to rising yields on gold, but also due to tighter monetary policy, said Jane Foley from Rabobank to the Financial Times.

Bank of England Governor Andrew Bailey stated that it will take ‘much longer than expected’ to bring inflation under control.

The sale of government debt on Tuesday pushed yields to levels not seen since the ‘mini-budget’ of former Chancellor Kwarteng last autumn, which included £45 billion of unfunded tax cuts. The yield on two-year British debt traded at 4.8 percent, compared to 4.64 percent last autumn.

The pound was also boosted by the broader weakness of the dollar, as it has long been expected that the Federal Reserve would pause its aggressive trend of raising interest rates, prompting investors to lower expectations for further increases in July. These expectations were ultimately realized as the Fed announced this week a long-awaited pause in rate hikes, which should, however, be only temporary.

– If monetary policy has been lagging for a long time, how does a one-month pause allow the Fed to assess what the current situation is? That really doesn’t make sense, said Kit Juckes from Societe Generale to the Financial Times, who expects the pound to rise against the dollar to a peak of $1.28, while he believes it has likely peaked against the euro.

– For sterling to outperform the euro, you have to truly believe that we will see interest rates at least one percent higher than current levels before Christmas, he explained.