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The British pound recently made a remarkable recovery after a turbulent period last fall. Investors initially expressed concerns about budget plans from former Prime Minister Liz Truss, but the pound has since rebounded.
Sterling reached its highest level against the US dollar in 10 months, surpassing $1.25 for the first time since June 2022. It has gained about 3.3% against the greenback since the beginning of the year, making it the best-performing currency among developed economies.
One of the key factors driving the pound’s strength is the resilience of the UK economy, which has outperformed expectations. Recent data suggests that economic activity expanded by 0.1% in the last quarter of 2022, up from initial estimates of zero growth. Additionally, GDP growth in January is estimated at 0.3% after a 0.5% decline in December.
Expectations of continued aggressive interest rate hikes by the Bank of England have also supported the pound. Higher interest rates attract foreign investors seeking higher returns, which in turn can boost the domestic currency.
Inflation in the UK has risen to an annual rate of 10.4% in February, underscoring the need for the Bank of England to maintain its tough stance on monetary policy.
The pound’s recovery comes after a steep decline to nearly $1.03 in September 2022 following the announcement of plans to increase borrowing and cut taxes by the Truss government. The International Monetary Fund had predicted a contraction of 0.6% in the UK economy this year, while other advanced economies were expected to grow slightly.
Despite the positive momentum, experts caution that market volatility could lead to exaggerated currency fluctuations. However, the outlook remains positive, with some analysts predicting the pound could rise to $1.30 or higher in the coming months.
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