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The British pound plummeted to a record low last fall due to concerns over budget plans by former Prime Minister Liz Truss. However, the currency is now staging a remarkable recovery.
Sterling recently reached its highest level against the US dollar in 10 months, surpassing $1.25 for the first time since June 2022. With a 3.3% increase against the greenback since the beginning of 2023, the pound is leading among developed economies this year.
Positive indicators of the UK economy outperforming expectations are driving this resurgence. Recent estimates suggest that economic activity grew by 0.1% in the last quarter of 2022, following a prior projection of zero growth. Additionally, GDP growth in January is estimated at 0.3% after a 0.5% decline in December.
The Bank of England’s commitment to aggressive interest rate hikes is contributing to the pound’s strength. This move attracts foreign investors seeking higher returns, which can boost the currency’s value.
Rising inflation in the UK, currently at 10.4% annually, underscores the necessity for the Bank of England to maintain its firm stance. The September 2022 drop to nearly $1.03, following Truss’ budget announcement, caused widespread panic in financial markets, triggering recession fears.
Since then, a significant drop in energy prices and China’s economic reopening have provided some relief and improved growth expectations in Europe. As a result, the euro and pound have both seen gains against the US dollar, with the pound’s rally being more pronounced due to previous steep declines.
Uncertainty about the Federal Reserve’s future actions and concerns about the economy following events like Silicon Valley Bank’s failure have led to a weakened US dollar. This situation has benefited currencies like the euro and pound.
Jordan Rochester from Nomura projects that the pound could reach $1.30 or higher this year, despite potential risks related to the Bank of England’s decisions and the impact of rate hikes on the UK economy. Francesco Pesole of ING warns that currency fluctuations may be exaggerated during volatile market conditions, as currently observed.
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