(Bloomberg) — The pound is trading at its strongest level in years, cementing its position at the top of the G-10 pack with strategists from Goldman Sachs Group Inc. to Pictet predicting more gains to come.
Sterling is looking unusually attractive relative to the currencies of other nations. Optimism around the new Labour government contrasts with political uncertainty in France and the US. And improving economic growth is curbing expectations for lower interest rates as other countries tilt toward easing. The UK’s biggest bank has pushed back its call for when reductions in the UK might start.
On Friday, the pound climbed to $1.2989, the strongest in almost a year and near the psychologically significant $1.30 level that Goldman predicts it could hit within two weeks. With the currency on track for its best month since November, there’s about $5 billion riding on more gains, CFTC positioning data show.
“The growth outlook is brighter and the real interest-rate differential is there,” said Kathleen Brooks, research director at XTB. “The pound is not seen as a risky currency anymore.”
The currency’s momentum underscores a broader shift in sentiment toward UK assets. Investors are hoping Prime Minister Keir Starmer’s government will draw a line under years of turbulence in British politics that saw the pound hit a record low in September 2022.
It’s clawed back 25% versus the greenback since then, and the ongoing political crisis in France has highlighted the UK’s newfound calm, helping lift the pound to its strongest level against the euro since August 2022.
“It’s a huge change compared to how hated it was,” said Janet Mui, head of market analysis at RBC Brewin Dolphin.
According to XTB’s Brooks, the currency could climb as high as $1.40 this year — a much more bullish call than the top forecast of $1.32 seen by year-end in a Bloomberg poll. Because the UK has loftier interest rates than the US when adjusted for inflation, investors treat the pound like a carry trade, borrowing where rates are low and investing in currencies where they’re higher, Brooks said.
Economic Boost
The latest help came on Thursday, when a slowdown in US inflation fueled speculation the Federal Reserve will cut rates before the Bank of England. UK data released the same day showed the economy expanded at twice the pace expected in May, delivering a boost to Starmer less than a week into the job.
“One may or may not agree with the Labour program, but at least there’s some clarity there,” said Michael Hart, senior currency strategist at Pictet Wealth Management, who turned bullish on sterling before the vote and plans to revisit that call in three months’ time.
Still, sterling bulls face a test next week when the UK releases inflation data for June.
The reading, a crucial component of the BOE’s rate outlook, comes just as bets for a stronger pound are approaching their highest this year. This raises the risk that any selling on the back of a weak reading could snowball if investors exit the positions en masse.
Signs of a significant inflation slowdown that bolster the case for rate cuts “could deal a blow to pound sentiment,” said Valentin Marinov, head of G-10 currency research at Credit Agricole.
(Updates price; an earlier version of the story corrected the direction of rate expectations in the second paragraph.)
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