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Pound hits $1.34 for the first time since 2022 but "concerns ahead of the Autumn Budget may be one reason why Sterling soon fell back"

ended 25. September 2024

This morning, Sterling hit $1.34 for the first time since 2022, but has dropped back since. Newspage asked currency experts and economists what's driving the strength in the Pound against the greenback, why it's dropped off and whether it could rally again.

One, Prem Raja, Head of Trading Floor at Currencies 4 You, said: “After the Fed delivered a 50bps cut, the Dollar has weakened considerably, and Sterling has gained across the board but most notably against the Dollar. There is potential for this strength to continue. However, a lot depends on how US jobs numbers come out next week and then the reaction to the UK Budget in late October. Concerns ahead of the Autumn Budget may be one reason why Sterling soon fell back. With the Bank of England expected to cut rates in November, we may start to see exchange rates ease off by then.”

Tony Redondo, Founder at Cosmos Currency Exchange, added: "The Pound is enjoying its ‘moment in the sun’. At one point today it was trading at its highest level against the US Dollar since March 2022. This is mainly being driven by interest rate differentials. Last Friday’s retail sales and Monday's PMI data indicate the UK economy is too robust for the Bank of England to entertain rapid interest rate cuts. In contrast, the US Dollar is under renewed pressure after two members of the FOMC, the Federal Reserve's interest rate setting committee, signaled the market was right to expect further interest rate cuts. Month-end flows and the Pound Sterling to US Dollar exchange rate reaching technically overbought levels could prompt a pullback as volatility should rise in the coming days as the end of the month and the quarter is approaching. This will require global portfolio managers to rebalance their currency exposure, creating seemingly random flows that generate volatility in either direction."

A third, David Nicklin, SSAS Consultant at Retirement Capital, commented: “The Pound’s surge to $1.34 signals market confidence in the UK’s resilience, but we can’t get complacent. A stronger Sterling is driven by global factors, like the Federal Reserve softening its stance, or improved UK economic forecasts, but we need to be cautious. Higher rates could pressure borrowers, and the trade balance could suffer if Sterling keeps climbing.”

The views of experts can be found below.

 

7 responses from the Newspage community

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Editor
Tony Redondo
Founder at Cosmos Currency Exchange
The British Pound is enjoying its ‘moment in the sun’. At one point today it was trading at its highest level against the US Dollar since March 2022. This is mainly being driven by interest rate differentials. Last Friday’s retail sales and Monday's PMI data indicate the UK economy is too robust for the Bank of England to entertain rapid interest rate cuts. In contrast, the US Dollar is under renewed pressure after two members of the FOMC, the Federal Reserve's interest rate setting committee, signaled the market was right to expect further interest rate cuts. Month-end flows and the Pound Sterling to US Dollar exchange rate reaching technically overbought levels could prompt a pullback as volatility should rise in the coming days as the end of the month and the quarter is approaching. This will require global portfolio managers to rebalance their currency exposure, creating seemingly random flows that generate volatility in either direction.
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Prem Raja
Head of Trading Floor at Currencies 4 You
The 'cable', the exchange rate between the US dollar (USD) and the British pound (GBP), has risen from 1.30 to 1.34 over the past two weeks following decisions from the US Federal Reserve to begin cutting interest rates and the Bank of England to keep interest rates on hold in September. After the Fed delivered a 50bps cut, the Dollar has weakened considerably, and Sterling has gained across the board but most notably against the Dollar. There is potential for this strength to continue. However, a lot depends on how US jobs numbers come out next week and then the reaction to the UK Budget in late October. Concerns ahead of the Autumn Budget may be one reason why Sterling soon fell back. With the Bank of England expected to cut rates in November, we may start to see exchange rates ease off by then.
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Riz Malik
Independent Financial Adviser at R3 Wealth
The Bank of England is expected to cut rates at a slower pace than the Fed, who kicked off their rate cutting cycle with a ‘jumbo’ cut. This is one of the reasons for an increase in demand for sterling.
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Gabriel McKeown
Head of Macroeconomics at Sad Rabbit - Substack Newsletter
Like a phoenix rising from the ashes, the pound is on a tear, reaching a two-year high against the dollar, driven by the stark contrast in monetary policy between the BoE and the Fed. Despite the Fed shocking markets by implementing a 50bps rate cut, the BoE is playing it cool, taking a decisively cautious approach, as inflationary pressures persist in the UK. This divergence has made the pound the belle of the ball for investors seeking higher yields, especially as the UK economy shows resilience with a more stable outlook. If the BoE remains relatively hawkish, the pound could continue its upward dance, potentially reaching the 1.4 mark against the dollar. Yet it won’t be the only beneficiary as the Fed tunes its policy to a more dovish melody, with small-cap stocks poised to punch above their weight in a low-rate world, along with gold’s continued ascent drawing envy from other sectors. However, the pound is leading the waltz in the ever-changing dance of global markets.
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John Choong
Head of Equities and Markets at Interpretiv
Sterling's ascent may face headwinds as economic tides shift on both sides of the Atlantic. The US’ upcoming Q2 GDP release tomorrow is poised to be a game-changer, with expectations of a robust jump from 1.4% to 3.0%. A figure closer to 3.0% could recalibrate Fed rate cut expectations and potentially fortify the greenback, which would halt the pound's upward march, at least until next week’s non-farm payrolls data. Meanwhile, MPC hawk, Megan Greene's latest speech suggests a softening stance on maintaining elevated rates if the economy weakens, hinting at a possible November rate cut. This shift in her tone, coupled with the anticipated downward revision of the UK's Q2 GDP on Monday, could narrow the rate differential outlook between the US and UK, applying downward pressure on GBP/USD. Despite these bearish signals, it's not all doom and gloom for sterling, however. Upside potential remains, especially if inflation and wage pressures in the UK don’t abate.
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Patricia McGirr
Founder at Repossession Rescue Network
This spike in Sterling may suggest confidence in the UK economy is bouncing back, but let’s not get the bunting out just yet. With inflation easing and some stability on interest rates, it’s no surprise investors are feeling a bit more bullish. That said, we’re still walking a tightrope. The US is wrestling with recession fears, and any misstep from the Bank of England could result in a quick reverse. The pound could keep climbing but let’s call it cautious optimism for now. Great if you’ve booked a quick holiday, but don’t set any long term goals on this news.
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David Nicklin
SSAS Consultant at Retirement Capital
The Pound’s surge to $1.34 signals market confidence in the UK’s resilience, but we can’t get complacent. A stronger Sterling is driven by global factors, like the Federal Reserve softening its stance, or improved UK economic forecasts, but we need to be cautious. Higher rates could pressure borrowers, and the trade balance could suffer if Sterling keeps climbing. For pensions and SSAS trustees, this creates an opportunity to reassess dollar-denominated assets and hedge currency risks, but we must stay vigilant whilst uncertainty still looms in both economies.