Pound hits 29-month high against the dollar
The pound hit a fresh 29-month high against the dollar on the back of hopes of an outsized interest rate cut in the US economy next month.
Sterling gained 0.25 per cent on Tuesday to $1.323, the strongest since March 2022 after Jerome Powell, Federal Reserve chairman, last week confirmed that the “time has come” for monetary easing in the world’s largest economy.
In contrast, Andrew Bailey, governor of the Bank of England, did not hint at the need for another rate cut in the UK during the annual Jackson Hole symposium.
Traders have ramped up bets on the Fed carrying out a 50 basis-point cut to borrowing costs next month, which would mark the first monetary loosening since the pandemic. Lower interest rates weigh down on an exchange rate.
The dollar has fallen against all major currencies this month, with a measure of the trade-weighted greenback weakening to the lowest level since July 2023. The Fed has made clear its intentions after data has shown a softening in the US labour market, where unemployment is rising and jobs growth has slowed.
“The foreign exchange markets are seemingly pricing this as a time to short the dollar,” Lee Hardman, currency strategist at MUFG, a Japanese bank said. “The Fed can and may adjust real rates more rapidly than other central banks.”
The pound has been one of the best-performing major currencies in the world this year, gaining 3.8 per cent against the dollar since January and 5 per cent over the last 12 months.
Sterling rose by 0.2 per cent against the euro to €1.183, a one-month high on Tuesday.
Investors are betting on only one or two more rate cuts in the UK before the end of the year, compared to three in the eurozone and US. This relative divergence in monetary policy strategies should prop up sterling.
