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The pound rose to its highest against the dollar since March 2022 on Tuesday as investors prepared for the Federal Reserve to begin cutting interest rates more quickly than the UK’s central bank.
The pound rose as much as $0.4 against the greenback to $1.3246 as traders digested differing forecasts from Federal Reserve Chairman Jay Powell and Bank of England Chairman Andrew Bailey at a central bankers’ summit in the US late last week. The gains put the pound on track for its best monthly performance against the dollar since November.
Powell said the “time has come” for interest rate cuts in the US, but Bailey struck a more cautious tone, warning that it was “too early to declare victory over inflation”.
“The stark contrast between Powell’s green light for a rate cut and Bailey’s more cautious stance at Jackson Hole is a good summary of the reasons for the pound’s strength,” said Kyle Chapman, foreign exchange analyst at foreign exchange broker Ballinger Group, referring to last week’s summit.
The differing outlooks come as investors expect the Fed to cut its benchmark interest rate seven or eight times by a quarter of a percentage point before the end of the year. But traders are divided on whether the first cut next month will be 0.25 or half a percentage point.
The BoE, meanwhile, made its first rate cut in more than four years earlier this month, but traders expect there to be only four more by the middle of next year.
