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The British pound faced a historic crash last autumn due to investors’ concerns over the budget plans of former Prime Minister Liz Truss. However, it has made a remarkable comeback since then. 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 this year, the pound stands out as the best-performing currency among developed economies.
The UK currency’s resurgence is supported by signs that the country’s economy is faring better than anticipated. Recent data suggests the economy expanded by 0.1% in the last quarter of the previous year, an improvement from the initial estimate of zero growth. Moreover, January saw a GDP growth of 0.3% following a 0.5% decline in December.
The positive economic performance is reinforcing expectations that the Bank of England will continue with aggressive interest rate hikes despite concerns about global banking health. Increased interest rates can attract foreign investors seeking better returns, hence bolstering the domestic currency.
Inflation in the UK surged to 10.4% annually in February, emphasizing the necessity for the Bank of England to uphold its stringent stance.
With the pound having plummeted to nearly $1.03 in September 2022 following unsettling fiscal measures by the Truss administration, the International Monetary Fund predicted a contraction of 0.6% in the UK economy this year, while other advanced economies are expected to grow marginally.
However, the decrease in energy prices and China’s economic recovery have alleviated some concerns about the UK’s economic prospects since the beginning of the year. This has led to a shift in growth expectations across Europe, positively impacting the UK currency.
While the euro has also experienced an upturn, rising by 2.3% against the US dollar in 2023, the pound’s rally has been more pronounced due to its substantial decline in 2022. Additionally, both currencies have benefited from the downward trajectory of the US dollar since last September, amidst fears of a potential recession in the country.
Uncertainty surrounding the Federal Reserve’s future actions has hampered the dollar’s performance in recent weeks. Speculation has grown that the Fed might pause or halt rate hikes in response to economic worries post the Silicon Valley Bank collapse last month.
Currency strategist Jordan Rochester from Nomura believes that the pound could climb to $1.30 or even higher this year. Nevertheless, risks remain regarding the Bank of England’s strategies and the impact of rate increases on the UK economy. Currency fluctuations tend to be exaggerated during turbulent market conditions, as is evident presently.
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