The pound rose on Friday nearing its highest in almost three months, lifted in part by a broad-based retreat in the dollar, but also by a rise in UK bond yields after this week’s budget update included a forecast of higher government debt issuance.
Also bullish for sterling was a reading of consumer confidence on Friday that showed people in Britain turned more optimistic about the outlook for the economy and their personal finances this month, although sentiment is a long off where it was before COVID struck in early 2019.
Sterling rose to a high of $1.2575 on Thursday, taking advantage of lower trading volumes because of the U.S. Thanksgiving holiday to make inroads against the dollar.
By Friday, the pound traded around $1.257, up 0.28%. Against the euro, sterling was up 0.2% at 86.84 pence.
Currency markets are caught up in shifting expectations for the timing of the first central bank rate cuts. Money markets show traders believe the Fed could move as soon as May, while the Bank of England is expected to cut later and by less.
This, in theory, should support sterling, but if the concern among investors is over the economic outlook, that complicates the picture, Trade Nation senior market analyst David Morrison said.
“It’s very difficult for the Bank of England, in particular, because the economic data hasn’t been great – a bit like the euro zone – growth is pretty tepid and yet inflation remains way above target,” he said. “I just don’t see us escaping a recession here. That’s in my bones.”
On Wednesday, Finance Minister Jeremy Hunt unveiled a series of tax boosts to support the UK economy, but estimates of both growth and inflation were more pessimistic than previously forecast.
Headline inflation subsided to 4.6% in October. A year ago it was at 11%, but it is still double the BoE’s target of 2% and well above consumer inflation rates in either the United States or the euro zone.
The Office for Budget Responsibility, the UK’s budget watchdog, forecast inflation to reach 2.8% in 2024, compared with a forecast of 0.9% in March.
Separately, the Debt Management Office cut its gilt issuance remit for 2023/24 to 237.3 billion pounds ($295.7 billion) from 237.8 billion pounds previously.
The 500 million-pound cut was smaller than any primary dealer predicted in a Reuters poll, which has sent 10-year gilt yields up 20 basis points this week to their highest since Nov 14.
“If we start seeing some bad GDP numbers and if we do start to see unemployment going up, given everything else, you’ve then got the Bank of England maybe having to cut rates,” Morrison said.
Data from market research firm GfK on Friday showed UK consumer confidence index was stronger than anticipated in November, increasing to -24 from October’s three-month low of -30. November’s reading was above the -28 forecast in a Reuters poll of economists, and follows a sharp fall the month before.
“Recent ups and downs in confidence have underlined the nation’s topsy-turvy economic mood as encouraging news about falling inflation and wage growth is offset by high personal taxation, alongside costly fuel and energy bills,” Joe Staton, GfK’s client strategy director, said.