The pound climbed to its highest level against the dollar (GBPUSD=X) since June as the US greenback weakened on expectations of an interest rate hike slowdown.
The British currency touched $1.23, having bounced back from its record low of around $1.03 two months ago after the chaos of Kwasi Kwarteng’s mini-budget.
The move higher will help slightly with the current cost of living crisis as it will make imported goods less expensive.
Simon French, chief economist and head of research at Panmure Gordon, said: “Sterling at this level will dampen inflation in 2023 — compared to counterfactual of sterling’s weak value in October.
“This may be difficult to spot in headline data but terms of trade improvement is a big influence given the large UK trade deficit. Some comfort for UK consumers."
Since the turmoil in financial markets in September, international investors took an improved view of the UK economy last month, helped by chancellor Jeremy Hunt’s autumn statement. The pound climbed from $1.1469 to $1.23 during the period.
Traders are also anticipating a slowdown in US interest rate hikes, which has caused them to shift from the dollar into riskier assets.
Since hitting a 20-year peak in late-September, the dollar has lost around 8% of its value against its major peers, having depreciated by 1.5% this week alone.
On Wednesday, Fed chair Jerome Powell signalled that monetary policy would remain restrictive for some time, and that slowing the pace of hikes would be a good way to “balance the risks”.
This could come as soon as the December FOMC meeting, he said.
James Athey, investment director at abrdn, said: “Sterling has been one of the biggest beneficiaries of the market’s latest attempt to price an immaculate pivot from the Fed — growth and inflation soft enough to allow an easier Fed, but not so soft that it’s evidence of real economic stress.
“This has seen yields coming down and the greenback giving back some of the significant gains for the year. Risk assets have reacted with typical, if ill-advised, gusto and so risk facing currencies like pound sterling have rallied strongly.
“Of course, domestic factors have played a part, as a semblance of institutional credibility has returned to the shores of Blighty via a renewed conservatism among the Conservative party and finally a long-overdue 75bp hike from the Bank of England.”
However, economists are still warning that a UK recession is coming, which would have a negative effect on the pound.
The currency is also still trading much lower than its pre-pandemic level of $1.30, and its pre-Brexit referendum rate of $1.50 in 2016.