The British pound surged to its highest level against the US dollar given the Bank of England’s less dovish stance compared to that of the Federal Reserve at the Jackson Hole Symposium on Friday.
The British pound soared against other currencies in the G-10 group on Friday following the Jackson Hole Symposium, a conference in Wyoming hosted by the Federal Reserve (Fed) to discuss central banking policies.
The pound surged against the US dollar, reaching above 1.32, the highest level since March 2022. It rose against the euro to over 1.18, a three-week high.
Fed Chairman Jerome Powell signalled a likely rate cut in September, contributing to a further decline in the US dollar.
In contrast, Bank of England Governor Andrew Bailey stated that additional interest rate cuts would not be rushed, despite a long-term easing of inflationary pressures.
This stance was seen as more hawkish compared to that of the Fed Chair.
Pound emerges as a high-yield currency
The pound gained appeal among investors due to expectations of higher yields compared to other currencies.
Markets anticipate that the Bank of England may maintain interest rates at elevated levels for longer following Governor Bailey’s speech, leading to a higher yield on UK government bonds than their US counterparts.
The UK 10-year government bond yield stood at 3.91% as of close on Friday, the highest among major central banks.
In contrast, the yield on the US 10-year Treasury fell to 3.78%, marking its lowest point of the year.
After slipping into a technical recession in the second half of 2023, recent economic data indicates that the UK economy has recovered rapidly this year, with Gross Domestic Product (GDP) growing by 0.6% in the second quarter, following a 0.7% rise in the first three months of 2024.
This represents the strongest growth in the first six months among the G7 countries, compared to a 0.7% increase in the US and 0.3% in the eurozone.
Meanwhile, annual inflation rose to 2.2% in July from 2% in the previous month, likely deterring the Bank of England from further rate cuts.
The pound has also been buoyed by the UK election in early July, as the Labour Party’s landslide victory is expected to provide stability and further support economic growth.
Policy optimism has made the pound particularly attractive.
In particular, the new ruling party has pledged not to increase taxes or National Insurance while committing to boosting housing supply and reducing migration.
USD weakness may continue amid Fed policy pivot
The US dollar is likely to extend its weakness this year following the Federal Reserve’s confirmation of a rate cut in September.
At the Jackson Hole event last Friday, Fed Chair Jerome Powell stated, “The time has come for policy to adjust,” marking a pivotal moment for the central bank.
Markets are even anticipating a possible deeper reduction of 0.5% next month and a full 1% cut for the remainder of the year.
This Fed pivot could be just the beginning of a weak US dollar, putting upward pressure on other major currencies in the G-10 group.
The pound could be particularly buoyed by the weak dollar, given the Bank of England’s reluctance to implement further rate cuts.
BOE Governor Andrew Bailey noted that “it is too early to declare victory” over inflation and cautioned against lowering borrowing costs “too quickly or by too much”.
Analysts expect the Bank of England to deliver only one more rate cut for the remainder of the year, following the first reduction in August.
The anticipated slower pace of rate cuts, compared to that of the Fed, could support a long-term uptrend in the pound against the US dollar.
Should this trend continue, the momentum could push GBP/USD to surpass 1.4, a level last seen in June 2021 when the Fed signalled the start of rate hikes amid surging inflation at the time.
The US Dollar Index, a measure of the dollar’s value relative to a basket of foreign currencies, dropped to 106.5, the lowest level since December 2023, early on Monday.
Not only has the pound surged against the greenback, but the euro also strengthened on Friday, with EUR/USD reaching just under 1.2, the highest level since July 2023.