Sterling climbed close to $1.30 on Thursday, hitting its highest since before Britain's parliamentary elections, as investors brought forward their expectations for when the Bank of England would begin to tighten monetary policy. After losing more than 2 percent against the dollar when Prime Minister Theresa May lost her parliamentary majority in the June 8 elections, the pound has recovered as BoE officials bent towards raising record low UK interest rates.
The Bank's Governor Mark Carney said on Wednesday that a rise in rates was likely to be needed as the economy comes closer to running at full capacity, and that the Bank would debate this in the coming months. For markets, that ran contrary to comments Carney made last week when he said now was not the time to raise interest rates, when his chief economist Andy Haldane flipped to support a hike later this year.
Sterling strengthened to $1.2995 in early European trade, its strongest since May 25 against a broadly weaker dollar. It was flat against a broadly stronger euro at 88.02 pence. "It's a clear push higher (for sterling) on a combination of the Bank of England looking a bit more hawkish than it was letting on and the Federal Reserve seeming to be quite content with their position (to raise interest rates)," said CMC Markets analyst David Madden.
"The Conservative Party have formed a minority government...that also adds to the overall political and financial stability of the UK because a lot of sterling's woes in the last month or so has come on the back of the general election." Political uncertainty was still on investors' radar, however, with hours to go until a deadline for Northern Irish politicians to reach an agreement to restore the British province's power-sharing executive.
With a weakening dollar and a strengthening euro, strategists were suggesting investors might now use the single currency to express a bearish take on sterling as Britain enters a period of political uncertainty negotiating its exit from the European Union.
"With the euro in play, many may feel that the euro also now provides a more suitable vehicle with which to express their politically-orientated doubts about sterling: of course, there is just the question of whether the market has placed the appropriate spin on Mr Carney's 'hawkish' comments yesterday," Neil Mellor, currency strategist at Bank of New York Mellon, wrote in a note.
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