Talk about the currency tumbling to US dollar parity was everywhere during Liz Truss’s disastrous premiership. Hardly anyone was optimistic about a country on the brink of its longest-ever recession.
But the bleak views are proving to be overstated, at least for now. The pound has roared back this year, delivering the best performance of any major developed currency. Strategists are turning more positive too, with Nomura Holdings, NatWest Markets and HSBC Holdings saying the rally will continue.
“The reality is, things aren’t as bad as everyone worried they would be,” said Dominic Bunning, head of European FX research at HSBC. “It’s only now that people are starting to wake up to this idea.”
To be sure, the UK economy is not in good health. Inflation remains sticky and the International Monetary Fund said last week that Britain is likely to suffer one of the biggest rises in unemployment amid an economic contraction. But after eleven back-to-back interest-rate hikes, the pound is an appealing destination for investors compared with the dollar, as US traders position for the Federal Reserve to reduce rates already this year.
The pound is up nearly 5% against the dollar on a total returns basis, which factors in interest as well as price moves, data compiled by Bloomberg show. Sterling briefly hit a 10-month high of $1.2546 on Friday.
Back in November, the Bank of England pushed through its biggest interest-rate increase in 33 years, accompanied by dire predictions about the economy. Now, recent data including surging retail sales and stabilizing house prices suggest the blow isn’t so deep, and the BOE is no longer expecting a contraction this quarter.
