Inflation Remains High, Prompting Bank of England to Raise Interest Rates Significantly, Boosting Pound in Q2
Sterling was the best performing currency among the Group of 10 leading economies in the second quarter as the Bank of England (BoE) continued to raise interest rates aggressively to curb stubbornly high inflation.
The pound gained nearly 3% against the dollar, its third consecutive quarterly gain. The pound rose as much as 12 per cent against the yen, its best performance in more than a decade.
The pound strengthened in tandem with gilt yields as investors anticipated that the Bank of England's tightening cycle was far from over. In June, the central bank stepped up its tightening pace, raising the policy rate by 50 basis points to 5.0 percent as UK (GBR) inflation beat expectations for four consecutive months. Swaps prices show traders expect rates to rise to 6.3 per cent in February, the highest level since 1998. Schroder Investment Management recently raised its forecast for the Bank of England's terminal rate to 6.5 per cent.
Mujie Zhao, currency analyst at Monex Europe, said: "Given the divergence in interest rate expectations, it is surprising that the pound has not rallied further. We believe this is largely due to rising interest rate expectations that have heightened concerns about the UK economy."
Anja Andrianova, an analyst at Bloomberg Intelligence, said: "It remains to be seen whether the rally in sterling can be sustained as rising borrowing costs dampen activity among households and businesses. The gilt market is also flashing warning signs, with the Yield Curve inverting to its highest level in decades."
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