The pound rose to its highest level since March 2022, breaking the $1.33 mark, after the Bank of England decided to keep interest rates at 5 percent and announced a gradual approach to monetary easing.
Sterling rose as much as 0.7 percent against the dollar to reach $1.331 following Thursday’s Bank decision. The currency also gained 0.3 percent against the euro to reach €1.19, its strongest level since July. The increase came as the US Federal Reserve made a larger-than-expected half-point interest rate cut earlier this week.
High interest rates tend to strengthen a currency’s value by attracting investors looking for better returns. Although Britain has slowed its rate cut cycle compared to the US and the eurozone, traders expect just one more rate cut from the Bank of England in November, keeping the pound competitive. Nomura analysts have predicted that sterling could reach $1.35, a level not seen since January 2022.
Despite inflation falling to 2.2 percent, close to the Bank’s target of 2 percent, the Monetary Policy Committee (MPC) said it would gradually lift the policy stance, with inflation set to close by the end of the year would probably rise to 2.5 percent. The decision to suspend interest rate cuts weighed on British government bonds, causing ten-year government bond yields to rise by four basis points to 3.88 percent.
Meanwhile, the FTSE 100 and FTSE 250 indices both rose to close 0.9 percent and 1.6 percent higher respectively.
However, Nick Andrews, senior FX strategist at HSBC, warned that the pound’s gains could be short-lived. He predicted that the pound could weaken because the Bank would eventually have to cut rates more aggressively than currently expected. He added: “The outlook for the UK economy is likely to weaken against the US, which will weigh on the pound/dollar.”