Pound hits fresh high above $1.31 after the British economy shrank less than expected
The pound hit a new 15-month high above $1.31 yesterday after the British economy shrank less than expected.
Sterling rose as high as $1.3114 – a level not seen since April last year – against a broadly weaker dollar.
The rally came after official figures showed the UK economy shrank by 0.1 per cent in May as three bank holidays, including one for the Coronation, took their toll.
Rally: The pound hit a new 15-month high above $1.31 after figures showed the UK economy shrank by 0.1% in May as three bank holidays took their toll
However, the decline was not as sharp as feared, and suggested the economy is holding up in the face of high inflation and rising interest rates.
Britain’s currency has been rising against the dollar as investors have wagered that the Bank of England will have to keep raising interest rates while the US Federal Reserve is close to stopping.
The Bank looks set to raise rates from 5 per cent to 5.5 per cent next month and investors are betting they will top 6 per cent by the end of the year.
Expectations of higher interest rates in a country tend to boost its bond yields, making them look more attractive, and boost the domestic currency.
But while inflation in the UK remains stubbornly high at 8.7 per cent – more than four times the 2 per cent target – figures this week showed US inflation has fallen to 3 per cent.
Michael Owens, senior sales trader at Saxo Global Markets, said the fall in US inflation suggests ‘we may have reached peak US rates’ – denting the dollar.
On top of that, Owens added that ‘every bit of data that’s coming out of the UK seems to be not quite as negative as the market was expecting’.