LONDON — The British pound on Wednesday broke above the $1.3 level against the U.S. dollar for the first time in a year, as investors bank on a coming period of growth-friendly policies and political stability under the newly elected Labour government.
Sterling was 0.49% higher at $1.3027 at 9:55 a.m. in London (4:55 a.m. ET), hitting its highest level since July 19, 2023.
U.K. inflation came in at the Bank of England’s 2% target for a second straight month, figures published earlier on Wednesday showed.
However, the inflation print slightly reduced market bets on an August rate cut from the central bank due to the stickiness of the key services print. Higher rates tend to increase the attractiveness of a currency.
The pound was meanwhile up 0.07% against the euro, at 1.1908.
The U.K. currency has also been supported by the recent landslide parliamentary victory for the Labour Party, according to analysts.
“With strong economic data out of the UK in recent weeks, alongside the relative ‘safe harbour’ stable UK politics, chances of an imminent rate cut in August have been diminishing and sterling has made solid gains,” Joe Tuckey, head of FX analysis at Argentex, said in emailed comments.
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“This morning’s steady inflation data at 2% coming in just higher than expectations, may only serve to slightly reduce the chance of an August cut, and perhaps underpin the recent sterling strength.”
Sterling is the only currency that outperformed the U.S. dollar in the year to date within the G10 group of advanced economies and was the second-best performer last year, Jane Foley, head of FX strategy at Rabobank, told CNBC’s “Squawk Box Europe” on Wednesday.
That comes within the context of the British pound-U.S. dollar trade falling to its lowest-ever level in September 2022 amid the “mini-budget crisis” of the previous U.K. government, Foley added.
“Sterling is beginning to get back on its feet, and there is a lot of optimism, I think right now, that perhaps with more stable politics that we can begin to get a better tone in terms of investment,” Foley told CNBC.
“We’ve seen the right noises from [new finance minister] Rachel Reeves about trying to promote growth, trying to get the private sector involved in trying to boost investment and productivity. So, [there have been] the right noises so far, [and] perhaps it’s a honeymoon period, we’ll have to wait and see.”
She added, that “there does seem to be that this view that as long as politics remains relatively boring, and to be fair, it was last year, at investment growth can return.”
Yields on U.K. government bonds, known as gilts, were broadly slightly higher following the consumer price index print. The 2-year yield was up two basis points to 3.995%, while the 10-year yield was up one basis point to 4.068%. Yields move inversely to prices.
Overall, gilt yields are lower since the Labour win on July 4.