Pound sterling reaches two-year high against the dollar as interest rate bets diverge
Sterling climbed to its highest point against the dollar in over two years as markets bet that the US Federal Reserve will cut interest rates more aggressively than the Bank of England.
The pound was trading just under 0.2 per cent higher against the dollar at $1.322 having traded just below $1.3250 earlier in the day, its highest point since March 2022.
Today’s gains extend a strong rally for the pound, with the currency having climbed 4.5 per cent from its August low. It is on track for its best monthly performance since November 2023.
The gains have come as traders ramp up bets that the Fed might be forced into an aggressive rate cutting cycle to avert an economic downturn.
Growth has slowed in the world’s largest economy while the latest jobs figures also showed a worrying rise in unemployment.
In a speech at the Jackson Hole Symposium last week, Jerome Powell said the “time has come” to cut interest rates reflecting these changes.
Powell left open the possibility that the Fed could cut rates by 50 basis points in September if incoming data pointed to a more meaningful downturn.
“Powell’s commentary at the Jackson Hole Symposium last Friday added further bearish pressure on the dollar,” Daniele Hathorn, senior market analyst at Capital.com noted.
Andrew Bailey struck a more cautious note at Wyoming’s central banking jolly, warning that it was “too early” to declare victory over inflation.
Services inflation remains above five per cent in the UK, as does wage growth, indicating some sticky price pressures. The latest figures also showed a surprise fall in unemployment, suggesting the labour market is tighter than previously thought.
Growth, meanwhile, has outperformed expectations. In the first half of 2024, the UK was the fastest growing economy in the G7 pointing to underlying economic momentum.
“(Bailey’s) comments stand to keep a wedge between US and UK rates, where money markets continue to price a shallower and slower easing cycle for the BoE,” Chris Turner, head of FX strategy at ING, said.
Markets expect the Bank of England to have cut interest rates around four times by the middle of next year whereas the Fed is expected to cut rates as many as eight times by mid-2025.