The pound has rallied against the dollar
The pound has rallied against the dollar to become the best performing currency of the G10 group of economies. Sterling rose to 1.25 against the dollar this week after hitting the same point for the first time since June 2022.
It comes after the pound received a battering in the wake of former Chancellor Kwasi Kwarteng’s “mini-Budget”, which spooked the markets with its historic tax cuts funded by a huge increase in borrowing.
The pound tumbled against a range of currencies in the aftermath and flirted with parity against the dollar as investors lost confidence in the UK.
Harry Adams, CEO of foreign exchange broker Argentex, told the BBC on Friday: “It has indeed been a rollercoaster, not just the last couple of weeks, but the last year, or since Brexit.
“The pound took a big hit last year on concerns of high inflation, stagnation fears, the terrible economic forecasts that were being banded around – the reliance on overseas energy and of course the political circus we experienced towards the end of last year, which was the final nail in the coffin that lost all credibility for the pound.”
Exchange rates advertised outside a shop in London
An image showing dollar bills and a pound coin
Mr Adams explained that currencies rely on stability and if this footing is not in place then it will lose.
He said there are two reasons for the sterling’s rally, adding: “The economic data is now starting to improve. It’s not as bad as we first thought and a lot of the data that is coming out… is beating expectations.
“But you’ve also got a big unwind of dollar strength. Back last year when there were some big bets against the pound and for the dollar, they’re all starting to wind back a little bit as it’s believed the Federal Reserve is peaking on their cycle on tightening.”
Asked if sterling’s rally is more to do with the greenback, Mr Adams said: “There are two sides to this, when you’re putting the pound up against the dollar there’s always going to be two sides to it. But in terms of where we’re going from here, I think it’s likely to be more of a sterling story than a dollar story.”
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Former Chancellor Kwasi Kwarteng
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He added that there is still a “big unwind” for the dollar to go through, adding: “But the data on the UK is improving, the backdrop is improving. Our clients are believing it is likely to go higher.”
Kamal Sharma, Senior G10 FX strategist at Bank of America in London, said on Thursday that this could be “as good as it gets” for sterling this year.
He added: “The best of UK data surprises may be behind us and there is little encouragement that international investors are returning to UK asset markets – a necessary condition for medium-term optimism.”
But Mr Adams said no one would be able to give a definitive answer as to how good it will get for the pound this year.
A general view of the Bank of England
He said: “You’ve got to remember we are coming from a very, very low base and expectations so any data surprises to the upside will give sterling a lift.
“There’s still that inflation problem that the Bank of England have to grapple with, but their life is made a little bit easier as economic data improves.
“I wouldn’t put a cap on it, but I would be surprised if there’s a big move back up to 10-year average which is 1.37-ish.”
This week it emerged that Consumer Prices Index (CPI) inflation hit 10.1 percent in March, a fall from 10.4 percent in February, but still higher than the 9.8 percent experts predicted.
People walk past shops in Cambridge
Economists have said the base rate, which currently sit at 4.25 percent, could be increased further by the Bank of England in order to tame inflation.
Last month, Deutsche Bank economists predicted rates would most likely peak at 4.25 percent, but after this week’s smaller-than-expected drop in CPI inflation and continued wage inflation growth, they have said they are now guiding towards a peak of 4.75 percent interest rates.
Meanwhile, economists at Investec said they are pricing in “75 basis points” of increases by November, which would take rates to 5 percent.
Colleen McHugh, Chief Investment Officer at Wealthify, told the BBC there was “absolutely” a lot of interest from investors in the pound.
She added: “It’s very topical, it’s very positive to see the pound rallying against the dollar, but it is coming off a very low base… It is possibly more a case of dollar weakness.
“At the end of the day, sterling is a pro-cyclical currency. It will perform as the economy is performing and what you’ve seen in the last couple of months or so is this narrowing rate differential between the US and the UK and that’s probably in the last few days alone, with the inflation data that came out in the UK – which is potentially likely to lead to some additional rate hikes in the UK – higher interest rates does mean a stronger pound.”
Meanwhile, retailers saw sales fall in March as poor weather impacted Britons heading to the shops.
The Office for National Statistics (ONS) said retail sales volumes declined by 0.9 percent last month as clothes shops, department stores and garden centres all reported declines. Food sales were also down as rampant food inflation continues to weigh on shopping habits.
The decline in overall sales was heavier than expected, with economists predicting a 0.5 percent decline for the month. It comes after retailers reported a 1.1 percent increase in sales volumes in February, with the ONS marginally downgrading its original 1.2 percent growth figure.