Sterling soared last week, continuing a strong start to the year, as the prospect of a hawkish Bank of England continued to attract investors.
Last week the pound recorded its best week against the dollar since November, climbing as high as $1.288 on Friday, its highest level since last July.
Its strong performance last week simply continued a stellar start to the year. According to Bloomberg, sterling has outperformed 90 per cent of the world’s economies so far this year.
The pound’s relatively strong showing has reflected hopes that the UK economy has turned a corner on a difficult 2023, during which it fell into a shallow recession.
Wage growth has remained strong even as inflation has fallen sharply, giving households a real income boost.
Analysts at Pantheon Macroeconomics forecast that real disposable income would rebound 2.2 per cent in 2024, which would help consumer spending to climb two per cent in the year.
“The UK looks set for a year of strong growth in 2024,” Rob Wood, chief UK economist at Pantheon Macroeconomics said.
The prospect of higher growth has also forced the Bank of England to wait until the summer before it starts cutting interest rates. Markets are now only pricing in two or three rate cuts this year, down from nearer six when 2024 began.
Higher interest rates benefit domestic currencies, because international investors are able to earn a higher return on their investments.
Paul Robson, head of G10 FX strategy at Natwest, also drew attention to the UK’s increasingly supportive political background.
He said “an ever-growing list of specific UK risks have fallen by the wayside over the past year,” such as more intrusive trade barriers with the EU or a second Scottish independence referendum.
“The political outlook is stable despite the prospect of a General Election in November, so too the direction of economic policy,” Robson said, something that has not been the case for a number of years.
In the short run, sterling’s strength will be tested tomorrow when new figures for the labour market are released. Francesco Pesole, an FX strategist at ING, said the figures would be a “key challenge”.
“Wage growth figures…now represent the second most important input for the Bank of England after services inflation,” Pesole said.
This afternoon sterling was trading 0.26 per cent lower against the dollar at $1.282.
Economists expect total annual wage growth to fall back to around 5.6 per cent, down from a previous reading of 5.8 per cent.