The pound continued its rally on Wednesday, pushing to its highest level since August, amid the prospect that UK interest rates might not be cut from 5.25% as quickly as markets originally hoped.
This was according to a new analysis from Bank of America, which found that improved UK data outcomes are helping reinforce the Bank of England's (BoE) "higher for longer" message.
"Higher for longer rates helped by data bounce and critical for further GBP recovery," Kamal Sharma, an analyst at Bank of America in London, said. "GBP should trade at top of reset range."
The pound reached $1.27 during the session thanks to the warnings from BoE policymakers. On Tuesday Dave Ramsden, BoE deputy governor said inflation was becoming more “home grown” and that rates would need to stay elevated for some time in order to tame inflation, which is still above the 2% target.
Sterling has since pared back some of these gains to trade flat after Andrew Bailey, the governor of the Bank of England insisted he is not “ultra-pessimistic” about the UK economy.
The strength in the pound came amid pressure on the US dollar after a US Federal Reserve official said monetary policy is well positioned to slow the American economy and get inflation back to target.
The comments from Fed governor Christopher Waller fuelled expectations that interest rate hikes are over. He went on to say that if disinflation starts to become a concern, then rates could be cut in response.
He told a conference: "I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy.
”Economic data from October are consistent with the kind of moderating demand and easing price pressure that will help move inflation back to 2%."
Michael Hewson, chief markets analyst at CMC Markets, said: "This was taken to mean that the Fed was not only done on when it comes to further rate hikes, but also that rate cuts could come sooner rather than later.
"He went on to say that if disinflation starts to become a concern, then rates could be cut in response, rather undermining the recent narrative put forward by Fed chairman Jay Powell that rates needed to stay higher for longer.
"The sharp fall in the US two-year yield to three-month lows along with the US dollar, however his remarks were tempered by more hawkish comments from another Fed governor Michelle Bowman who argued that more rate hikes might be needed due to the continued resilience of the US economy."