LONDON: Sterling rose on Thursday, staying near a three-month high against a faltering US dollar, despite the prospect of a difficult winter ahead in the UK due to a cost-of-living crisis and soaring interest rates.
At 1022 GMT, the pound was up 0.4% against the dollar at $1.2095. It earlier hit $1.2113, the highest level since August 17. Sterling was up 0.2% versus the euro at 86.10 pence.
A weaker dollar was largely behind the pound’s upward move according to analysts, as investors placed bets on riskier assets as minutes from the last Federal Reserve meeting raised the prospect of slower US interest rate hikes.
Wednesday’s news that the Scottish government cannot hold a second referendum on independence next year without approval from the British parliament appears to have had little impact on the UK currency.
“In the current circumstances - where the UK state looks fragile in the wake of the disastrous Truss administration - then perhaps some of yesterday’s GBP gains can be attributed to relief that politicians will concentrate on running the country rather than faffing around with institutional arrangements,” said Mizuho senior economist Colin Asher.
The vote came after a data-heavy week for the UK, with flash purchasing manager index (PMI) data on Wednesday showing British economic activity staying near 21-month lows, though the figures were slightly better than economists polled by Reuters had expected, supporting this week’s rally in the pound Earlier in the week, the Organisation
for Economic Cooperation and Development (OECD) said Britain’s economy was set to lag major peers in 2023.
Official data showed UK government borrowing was less than expected in October although the budget deficit is likely to balloon in the months ahead.
“The data we have seen this week simply underscores that we are looking at a difficult year ahead...a lot of people do not appreciate the scale of the tax rises they are facing,” said Stuart Cole, macro economist at Equiti Capital. Bank of England (BoE) Chief Economist Huw Pill will be among the speakers at a BoE Watchers’ Conference on Thursday, with traders looking for hints over what the central bank might do next with interest rates.
After raising the base rate by 75 basis points earlier this month, the Monetary Policy Committee is expected to add a more modest 50 basis points on Dec. 15, taking the base rate to 3.50%, a Reuters poll of economists found.