Pound Roars Back: Sterling hits $1.20 against fading dollar for Hunt Budget
The pound climbed back above $1.20 against the US dollar for the first time in three months, a boost for Chancellor Jeremy Hunt ahead of tomorrow’s fall statement.
The British pound has risen in recent days as the greenback weakens on speculation that the aggressive pace of rate hikes in the US could slow.
The recovery represents a strong rebound after the chaos of former Chancellor Kwasi Kwarteng’s disastrous mini-budget, which saw the pound hit an all-time low of less than $1.04 in September.
Recovery: The British pound has risen in recent days as the greenback weakens on speculation that the aggressive pace of US rate hikes could slow
Yesterday, the pound rose nearly three cents to $1.2025 – its highest level since August 18 and 16 percent above its low of $1.0386 seven weeks ago.
The gains later partially faded and the British pound fell below $1.19. Sterling also rose against the Euro, rising by as much as one cent to €1.1478.
The rally was partly due to official data showing a stronger-than-expected 5.7 percent wage increase in the UK.
That could add to the ammunition of the Bank of England hawks who are pushing for another big rate hike next month to fight inflation.
But the broader currency story in recent days has been dollar weakness after US consumer price inflation data for October came in weaker than expected last week.
Yesterday, US farm and factory inflation data also came in milder than forecast, adding to the sense that the US price spiral may have peaked.
That would give the US Federal Reserve room to scale back the aggressive pace of rate hikes in recent months.
The pound’s position heading into the fall statement is much stronger than it was under Liz Truss’s short-lived and chaotic premiership.
Even before the mini budget, the pound was trading below $1.13 following a summer of political uncertainty following the impeachment of Boris Johnson.
Chancellor Jeremy Hunt has tried to reassure markets that the government will get a grip on public finances
Since Truss was taken out, Hunt and her replacement Rishi Sunak have tried to reassure markets that they will get a grip on public finances – undoing most of Kwarteng’s ill-received and unfunded tax cuts, and the likelihood of further drastic action increased this week.
The pound’s weakness has had some benefits, such as attracting American tourists to London and making manufactured goods more competitive for export customers. But it has increased the inflationary pressures faced by consumers and businesses as dollar-denominated imports become more expensive.
The pound is still down 12 percent against the dollar so far this year.
Gilts – parcels of British government debt – were another victim of the mini-Budget.
The market turmoil pushed investors to demand rates of more than 4.5 percent for buying 10-year government bonds, the highest rate since the 2008 financial crisis, but they have since fallen to about 3.3 percent.
More turbulence could be ahead as Hunt tries to plug the £50bn public finance black hole without crushing economic growth.
Jeremy Stretch, a currency strategist at CIBC Capital Markets, said: “We have the fiscal statement coming up and it’s going to be a sea of negativity.
That said, with the degree of policy tightening, the debate will be about how much of it will come in the next two years, and how much will be pushed to the next parliament rather than this one. .’