The pound rose above $1.20 yesterday for the first time in almost three months as expectations grow that US inflation has peaked.
US producer prices rose 0.2 percent in October, half what economists had forecast. The annual rate of wholesale inflation fell sharply to 8 percent, from 8.5 percent in September. Financial markets interpreted the data to mean that the US Federal Reserve may soon scale back its aggressive interest rate hikes, which have weighed heavily on share prices in recent months.
Last week the expectation was that the Fed would keep raising rates above 5 percent, but now they have fallen back to a high of 4.9 percent early next summer.
The probability that US politicians will raise interest rates by 50 basis points, from the 75 basis points they had previously sought, at their next meeting in December rose to 91 percent from 71.5 percent. hundred a few days ago.
Cooling inflation data weakened the dollar which, until recently, has rallied strongly this year.
Sterling rose 1.2 percent to $1.1902 at the close of business in London. Earlier in the session, the pound briefly rose to $1.2027 for the first time since mid-August. Other currencies, including the euro and the Japanese yen, also strengthened against the dollar.
The latest rally caps off a sharp turnaround in the sterling’s fortunes, which just six weeks ago, after the mini-budget, had fallen to a record low of $1,035.
David Stritch, a currency analyst at Caxton, said the pound could give back some of its recent gains tomorrow, when he expects Jeremy Hunt’s autumn statement to “force the wavers [Bank of England governor] Andrew Bailey to a lower rate hike in December” than the market expects.
The prospect of a slowdown in interest rate hikes boosted markets around the world. However, the sterling rally meant leading London stocks were left out.