2.4% Increase This Year... Pound Strengthens on "Expectations of UK Economic Recovery"

Expected UK Base Rate Cut in August

The value of the British pound has recorded a remarkable increase among global currencies this year, driven by growing expectations of economic recovery in the UK. The global investment banking (IB) industry predicts that the pound could have further room to rise against the dollar this year.

According to Bloomberg's compilation of exchange rates from over 140 countries as of the 10th (local time), only the currencies of 11 countries, including Kenya, Zambia, and Sri Lanka, have outperformed the pound so far this year. The pound-dollar exchange rate surged to about $1.29 on the 8th, the highest in seven months, marking a 2.4% increase year-to-date.

The strengthening of the pound is attributed to the spreading perception that the UK economy is showing more resilience than initially feared despite high interest rates. Last year, the UK experienced one of the lowest growth rates and highest inflation among major economies.

However, key indicators expected this week, which could be crucial for the Bank of England's (BoE) decision on interest rate cuts, are predicted to remain robust. The monthly gross domestic product (GDP) for January is expected to rebound with a 0.2% growth compared to the previous month, following a -0.1% decline in December. The UK’s average weekly wages are also forecasted to rise by 5.7%.

Bloomberg explained, “Strong economic data reassures the BoE that it does not need to rush into cutting interest rates.” Consequently, it is anticipated that the US Federal Reserve (Fed) and the European Central Bank (ECB), the central bank of the European Union, will begin lowering rates before the BoE.

The market expects the Fed and ECB to start their first rate cuts in June, while the BoE is projected to shift its monetary policy only by August.

Bank of America (BoA) forecasted that the pound could rise to $1.37 by the end of this year. BoA’s G10 currency strategy head, Athanasios Vamvakidis, stated, “The improving UK economy and slowing inflation will drive the pound’s strength.”

Kathleen Brooks, research director at XTB, noted, “The pound’s rise during the UK government’s spring budget week also signals a recovery of confidence after several rather bleak years for the UK.”