The British pound has hit $1.34 for the first time in nearly 30 months after rallying against the dollar in recent days in a boost for UK tourists heading to America.
Sterling surged after the Bank of England left interest rates unchanged at 5 per cent last Thursday, hours after a 0.5 percentage point cut by the US Federal Reserve .
And early this morning, the pound increased further to reach its highest level since March 2022 – hitting $1.3429 overnight, before retreating to $1.3372 by 11am.
The pound has been gaining against an already weakening dollar over the past week, and rose above $1.33 last Thursday – also for the first time in two-and-a-half years.
Now, sterling is continuing to rise on expectations that rate cuts from the BofE will be less aggressive this year compared to those across the Atlantic from the Fed.
The dollar has also faced further pressure after China ‘s aggressive stimulus package announced yesterday fuelled bets of another big Fed rate cut in November.
Sterling hit $1.3429 overnight which was its highest level since March 2022, as shown above
Traders work on the floor of the New York Stock Exchange during morning trading on Monday
Prem Raja, head of trading floor at Currencies 4 You, told MailOnline today: ‘After the Fed delivered a 50bps cut, the dollar has weakened considerably, and sterling has gained across the board but most notably against the dollar.
ANALYSIS: Pound leads the waltz in the dance of global markets
Like a phoenix rising from the ashes, the pound is on a tear, reaching a two-year high against the dollar, driven by the stark contrast in monetary policy between the BoE and the Fed.
Despite the Fed shocking markets by implementing a 50bps rate cut, the BoE is playing it cool, taking a decisively cautious approach, as inflationary pressures persist in the UK.
This divergence has made the pound the belle of the ball for investors seeking higher yields, especially as the UK economy shows resilience with a more stable inflation outlook.
If the BoE remains relatively hawkish, the pound could continue its upward dance, potentially reaching the 1.4 mark against the dollar.
Yet it won’t be the only beneficiary as the Fed tunes its policy to a more dovish melody, with small-cap stocks poised to punch above their weight in a low-rate world, along with gold’s continued ascent drawing envy from other sectors.
However, the pound is leading the waltz in the ever-changing dance of global markets.
GABRIEL MCKEOWN is head of macroeconomics at Sad Rabbit Investments
‘There is potential for this strength to continue. A lot depends on how US jobs numbers come out next week and then the reaction to the UK Budget in late October.
‘With the Bank of England expected to cut rates in November, we may start to see exchange rates ease off by then.’
BofE Governor Andrew Bailey said last Thursday after rates were held that it must be ‘careful not to cut too fast or by too much’, while the Fed now appears to be firmly on a rate-cutting path.
The BofE is however expected to resume rate cuts before the end of this year, having reduced the level last month from 5.25 per cent to 5 per cent.
Gabriel McKeown, head of macroeconomics at Sad Rabbit Investments, said: ‘Like a phoenix rising from the ashes, the pound is on a tear, reaching a two-year high against the dollar, driven by the stark contrast in monetary policy between the BoE and the Fed.
‘Despite the Fed shocking markets by implementing a 50bps rate cut, the BoE is playing it cool, taking a decisively cautious approach, as inflationary pressures persist in the UK.
‘This divergence has made the pound the belle of the ball for investors seeking higher yields, especially as the UK economy shows resilience with a more stable inflation outlook.’
He said that if the BoE remains ‘relatively hawkish’, the pound could continue rising and potentially reach $1.40.
But Mr McKeown continued: ‘It won’t be the only beneficiary as the Fed tunes its policy to a more dovish melody, with small-cap stocks poised to punch above their weight in a low-rate world, along with gold’s continued ascent drawing envy from other sectors.
‘However, the pound is leading the waltz in the ever-changing dance of global markets.’
And financial expert Patricia McGirr, founder of the Repossession Rescue Network, said: ‘This spike in sterling may suggest confidence in the UK economy is bouncing back, but let’s not get the bunting out just yet. With inflation easing and some stability on interest rates, it’s no surprise investors are feeling a bit more bullish.
A trader at the New York Stock Exchange looks at a series of graphs on his screen on Monday
‘That said, we’re still walking a tightrope. The US is wrestling with recession fears, and any misstep from the Bank of England could result in a quick reverse.
‘The pound could keep climbing but let’s call it cautious optimism for now. Great if you’ve booked a quick holiday, but don’t set any long term goals on this news.’
Meanwhile David Nicklin, a consultant at Retirement Capital, said: ‘The Pound’s surge to $1.34 signals market confidence in the UK’s resilience, but we can’t get complacent.
‘A stronger sterling is driven by global factors, like the Federal Reserve softening its stance, or improved UK economic forecasts, but we need to be cautious. Higher rates could pressure borrowers, and the trade balance could suffer if Sterling keeps climbing.
‘For pensions and SSAS (Small Self-Administered Scheme) trustees, this creates an opportunity to reassess dollar-denominated assets and hedge currency risks, but we must stay vigilant whilst uncertainty still looms in both economies.’
Traders work on the floor of the New York Stock Exchange during morning trading on Monday
Also commenting on the exchange rate was Tony Redondo, founder of Cosmos Currency Exchange, who said: ‘The British Pound is enjoying its ‘moment in the sun’. It’s trading at its highest level against the US dollar since March 2022.
‘This is mainly being driven by interest rate differentials. Last Friday’s retail sales and Monday’s PMI (Purchasing Managers’ Index) data indicate the UK economy is too robust for the Bank of England to entertain rapid interest rate cuts.
‘In contrast, the US dollar is under renewed pressure after two members of the FOMC, the Federal Reserve’s interest rate setting committee, signalled the market was right to expect further interest rate cuts.
‘Month-end flows and the pound sterling to US dollar exchange rate reaching technically overbought levels could prompt a pullback as volatility should rise in the coming days as the end of the month and the quarter is approaching.
‘This will require global portfolio managers to rebalance their currency exposure, creating seemingly random flows that generate volatility in either direction.’
Separately today, petrol prices have reached a three-year low due to a fall in oil prices and the strength of the pound.
The average price of a litre of the fuel at UK forecourts yesterday was 135.7p, the RAC said. Petrol prices reached a record high of 191.5p per litre in the summer of 2022 following Russia’s invasion of Ukraine the previous February.
