Britain’s pound is beating every other major currency this year

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CNN
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British pound crashed record low As of last fall investors rebelled against budget plans by former prime minister Liz Truss. Now, it’s enjoying a comeback.

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Sterling surpassed $1.25 against the US dollar for the first time since June 2022, reaching its highest level in 10 months. developed economy this year

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Britain’s currency has been boosted by signs that the country’s economy is doing better than expected. Activity is now thought to have expanded 0.1% in the final three months of last year, not an increase at all from the previous estimate. GDP growth is forecast at 0.3% in January after falling to 0.5% in December.

This flexibility is reinforcing expectations that the Bank of England will continue aggressive interest rate hikes despite concerns about the health of the global banking sector. Rising rates can boost the domestic currency as they help attract foreign investors looking for higher returns.

inflation in the United Kingdom jumped to an annualized rate of 10.4% in FebruaryUnderlines the need for the Bank of England to maintain its accommodative outlook.

The pound fell to near $1.03 in September 2022 after the truce government unveiled plans to boost borrowing while cutting taxes, triggering panic in financial markets, fueling fears of a recession in the United Kingdom.

The International Monetary Fund predicted in January that the UK economy would shrink by 0.6% this year, while all other advanced economies would grow, if only slightly.

“A lot of pessimism was being priced into the pound,” said Francesco Pesole, a currency strategist at ING.

But the sharp drop in energy prices and the reopening of China has brought some relief to the economic outlook since the beginning of the year.

“There was a huge re-rating of growth expectations around Europe, and that had an impact on the UK,” Pessole said.

The euro has also been lifted by these dynamics, with a 2.3% gain in 2023 against the US dollar. According to Pesole, the pound’s rally has been sharp in large part because its 2022 decline was more severe.

Both currencies have been aided by the greenback’s sharp decline from last September’s highs as fears of a recession spread in the United States.

A lack of clarity about the Federal Reserve’s next steps has also weighed on the dollar in recent weeks. Concerns about the economy following the failure of a Silicon Valley bank last month have fueled investor speculation that the Fed may cut or stop raising rates.

Jordan Rochester, a currency strategist at Nomura, said he thinks the pound could rise to $1.30 this year and “potentially higher”. But he still sees a risk given the uncertainty surrounding the Bank of England’s plans and how a rate hike will ripple through the country’s economy. And Pesole cautioned that currency fluctuations are often overdone when markets are volatile, as they are now.

“In a volatile market environment, moves tend to be faster,” he said.