The pound has been named one of the best-performing major currencies this year, shattering economists’ expectations after a Bank of England boss told Brits to “accept” being worse-off. But the UK economy is not yet out of the woods, analysts say, and the currency may have a “complicated” road ahead.
The pound experienced an enormous drop in value last year, plummeting to its lowest point after the disastrous economic strategy of former PM Liz Truss and her Chancellor, Kwasi Kwarteng.
And the Bank of England’s (BoE) leading economist Huw Pill told Brits they needed to “accept that they’re worse off” or they would continue to drive inflation.
Latent pessimism about the future of the pound after her short-lived premiership may now be misguided, however, with the currency managing to surge nearly 5 percent against the dollar on a total returns basis, according to data compiled by Bloomberg.
Raoul Ruparel, Director of the Boston Consulting Group Centre for Growth, suggested the surging pound was being “underdiscussed”.
He added the shift was likely driven by the expectation of investors that the BoE will maintain a tighter monetary policy – meaning higher interest rates – than the US Federal Reserve later in the year.
Higher rates make the pound a more appealing currency for investors – but it also increases the price of paying debts such as mortgages, credit card payments, and student loans.
Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, told Express.co.uk that business insolvencies could increase if rates rise, with higher borrowing costs led to a 16 percent rise in firms going bust last month.
NatWest strategists claimed in a recent note that there “planets were aligned” for the pound to break even higher – but some economists have expressed doubt over how far it will go.
Reacting to the rallying pound, currency expert and founder of the Adamis Principle, Patrick Reid, told Express.co.uk that the pound and the dollar were now “at the halfway point so a range-bound price action should continue”.
He said: “Range-bound” refers to the price of a currency bouncing between a high and low point – with the pound currently recovering from a low.
However Mr Reid added that the pound’s continued recovery is partly reliant on the reaction of the US, saying: “I don’t see this rallying more unless the federal reserve cuts [interest rates].”
Asked if the pound’s rally is more to do with the greenback, Harry Adams, CEO of foreign exchange broker Argentex, told the BBC last week: “There are two sides to this, when you’re putting the pound up against the dollar there’s always going to be two sides to it. But in terms of where we’re going from here, I think it’s likely to be more of a sterling story than a dollar story.”
The Bank’s base rate is currently 4.25 percent, with any changes set to be announced on May 11.
Inflation also remains a significant issue for the UK economy, still sitting above 10 percent, buoyed predominantly by food prices, which continue to surge.
