Thursday saw a rise in sterling in European trade versus a group of significant competitors, continuing its recent gains against the dollar and reaching a five-month high due to the Bank of England's forecast.
Due to the UK's persistent inflation, investors now anticipate that the BoE will postpone cutting interest rates.
GBP/USD
With a session low of 1.2793, GBP/USD gained 0.6% on Wednesday, marking the fourth straight gain as US 10-year Treasury yields fell. This is the highest level since August 1.
With a 6% gain versus the US dollar so far this year, sterling is expected to make a profit for the first time in three years and the most since 2017.
Inflation in the UK
Although the UK's inflation rate decreased to 3.9% in November, it is still much higher than the declared target of 2%.
In contrast, consumer prices in Europe increased by just 2.4% last month, while those in the US increased by 3.1%.
Therefore, it is anticipated that the European Central Bank and the Federal Reserve would start easing policy soon, while the Bank of England may take some time to catch up.
Bank of England
In order to fight inflation, the Bank of England stated at its most recent meeting in 2023 that interest rates should be high for a longer period of time.
In the event that inflation did not reach the 2% objective, the BOE even went so far as to suggest that more interest rate hikes may be forthcoming.
Governor of the Bank of England Andrew Bailey cautioned that there is still a long way to go before managing inflation and that it is still too soon to discuss interest rate reductions.
