As investors assessed the potential outlook for US interest rates, the British pound rose 1% against the dollar to its highest level since late August, while the dollar fell against a range of other currencies, including the euro and the US dollar. Australian and New Zealand dollars.
A cooler reading of US inflation last week has investors pondering the possibility of US interest rates rising more slowly, which in turn reduces the dollar’s appeal to foreign buyers seeking a yield.
“Today it’s more about higher betas against the dollar as the sun comes out,” said Jeremy Stretch, head of currency strategy at CIBC Capital Markets for the G10.
Newly appointed British Chancellor of the Exchequer Jeremy Hunt will present his autumn budget on Thursday, which is expected to include a raft of measures, including tax increases and spending cuts, to close a £50 billion ($59 billion) gap in British finances.
Hunt, along with Prime Minister Rishi Sunak, have done all they can to convince markets of the government’s fiscal wisdom, and will be keen to avoid the torrent of volatility unleashed by his predecessor, Liz Truss, with her own budget plan at the end of September.
The pound rose 1% against the dollar at $1.18785, while it rose 0.1% against the euro at 87.74 pence.
“There is a budget statement coming and it will be a sea of negativity. Although, with the degree of policy tightening, the debate will be about how much of that will come in the next year or two years and how much of that will be carried over to the next Parliament rather than this Parliament.”
The pound, which has lost more than 12% against the dollar this year, has gained 3% so far in November, on track for its biggest monthly gain since July 2020, when the economy began to recover after the first round of pandemics.
According to futures markets, the probability of Governor Andrew Bailey’s Bank of England raising interest rates by 50 basis points in December is 60% and the probability of a 75 basis point hike is close to 40%.
The UK unemployment rate rose to 3.6% in the three months to September, and job vacancies fell for the fifth consecutive year as employers worried about the economic outlook, the Office for National Statistics reported Tuesday.
Economists polled by Reuters had expected the unemployment rate to remain at 3.5 percent.
Meanwhile, average weekly earnings excluding bonuses rose 5.7% in the three months through September, beating expectations for a 5.5% increase and the fastest pace since the three months through August 2021.
However, as data Wednesday showed consumer prices rose 10.7% in October, wages are still far from keeping pace with inflation – another factor holding back economic growth in the UK.
Hunt’s statement is likely to be overshadowed by CPI data, and if there is a change in sterling it will likely be lower as the chancellor forces a reluctant Bailey to cut interest rates in December as the budget moves lower. The pressure on growth said Michael Brown, strategist at CaxtonFX.
($1 = 0.8428 pounds)