Pound Nears 3-Month High as Dollar Retreats and UK Bond Yields Rise

The British pound exhibited robust strength on Friday, nearing its highest levels since early September, fueled by a weakened dollar and rising UK bond yields. The currency climbed to $1.2602, marking a 0.53% increase, while against the euro, it rose 0.23% to 86.77 pence.

The surge in bond yields was propelled by an upward revision of government borrowing forecasts in the latest budget update, influencing investor sentiment positively. The low trading activity during the U.S. Thanksgiving holiday allowed sterling to reach $1.2572 on Thursday.

Analysts suggest that currency markets are currently navigating expectations of imminent rate cuts by central banks. Money markets indicate a potential rate cut by the Federal Reserve as early as May, while the Bank of England is anticipated to follow suit, albeit later and with a smaller reduction. These expectations, combined with a positive consumer confidence report, contributed to the pound’s upward momentum.

Tax Plans Boost UK Economy, Pound

On the fiscal front, Finance Minister Jeremy Hunt unveiled tax increases to bolster the UK economy. However, the projections for growth and inflation were more pessimistic than previously estimated, injecting an element of caution into the market.

October’s headline inflation dropped to 4.6%, down from 11% a year ago, though still exceeding the Bank of England’s 2% target. The Office for Budget Responsibility anticipates inflation to reach 2.8% in 2024, compared to 0.9% in March.

The Debt Management Office’s slight reduction in the gilt issuance plan for 2023/24, from £237.8 billion to £237.3 billion, had a notable impact on the market, pushing 10-year gilt yields up by 20 basis points.

In another positive development, the consumer confidence index, as reported by market research firm GfK, exceeded expectations by improving from -30 in October to -24 in November. The reading was above the -28 forecast in a Reuters poll and followed a sharp decline the month before.