Pound rallies to its highest level in a year as strong economic growth dents rate cut
The pound climbed to its highest level in a year after strong economic growth cast fresh doubt over when interest rates will finally be cut.
As the Office for National Statistics (ONS) revealed that output is rising at the fastest pace for two years, sterling rose by a cent to as high as $1.2947.
The UK currency was also boosted by data showing inflation in the US fell more sharply than expected to 3 per cent last month – weakening the dollar.
The figures in the UK dented hopes that the Bank of England will cut interest rates next month. They remain at a 16-year high of 5.25 per cent.
![Sterling up: As the Office for National Statistics revealed output is rising at the fastest pace for two years, sterling climbed by a cent to as high as $1.2947](https://i.dailymail.co.uk/1s/2024/07/11/20/87222709-13625513-image-a-16_1720726225345.jpg)
Sterling up: As the Office for National Statistics revealed output is rising at the fastest pace for two years, sterling climbed by a cent to as high as $1.2947
At the same time, the drop in inflation in the US suggested the US central bank, the Federal Reserve, may cut rates sooner than previously thought.
The result on the currency markets, where higher interest rates strengthen a currency while lower borrowing costs do the opposite, was a stronger pound and weaker dollar.
‘The pound has been supported by further evidence revealing that the UK economy is recovering more strongly than expected,’ said Lee Hardman, a currency analyst at MUFG.
The figures from the ONS showed the economy grew 0.4 per cent in May, twice as fast as expected.
And for the three months to May, output was 0.9 per cent higher than in the previous three months, the strongest pace of growth since January 2022.
That could persuade wavering Bank of England rate-setters to hold off on cuts when they meet on August 1.
It is the latest dampener on market expectations of a cut.
Hopes had been fuelled by a fall in inflation to the Bank of England’s 2 per cent target.
At the start of this week, market pricing implied a 60/40 chance of an August cut. This has fallen closer to 50/50.
And Chancellor Rachel Reeves said yesterday that while the Bank was ‘rightly independent’, the public ‘would welcome some relief with lower mortgage costs’.
However, hopes of a cut have been dented – first by cautious speeches from Bank of England chief economist Huw Pill and fellow rate-setter Catherine Mann indicating that they were still worried about underlying inflation pressures.
And they took a further blow on the GDP figures, which added to evidence that the economy is bouncing back after a recession at the end of last year.
The UK enjoyed first-quarter growth of 0.7 per cent, described as ‘gangbusters’ by the ONS.
Investment bank Goldman Sachs yesterday increased its forecast for UK GDP for 2024 from 1.1 per cent to 1.2 per cent.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said: ‘These GDP figures may make an August rate cut less likely by providing rate setters, concerned about underlying price pressures, with sufficient confidence about the UK’s economic recovery to continue putting off loosening policy.’
Sterling has also been buoyed by the prospects for the new Labour government.
Shahab Jalinoos, global head of FX research at UBS Investment Bank in New York, said: ‘The UK now has arguably the most stable government in the G7 over the next five years, due to the size of the majority.’
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Read More: Pound rallies to its highest level in a year as strong economic growth dents rate cut
2024-07-11 21:14:34