A Brexit transition deal and the expectation of an interest rate hike pushed the Pound up to its highest level since the EU Referendum.
The Pound topped $1.43 on Tuesday, a level not seen since the day voters went to the polls to decide on the UK’s future in the European Union.
The milestone came after a period of steady growth, which will be good news for importers as well as Brits heading abroad on their holidays, if not for exporters.
Daily FX Senior Currency Strategist Christoper Vecchio explained: “The British Pound has been steadily rising for the past few months against its peers for two main reasons.
“First, the mood around Brexit has turned decidedly more positive. There’s been scant talk of a ‘hard Brexit’ scenario playing out now that the UK and the EU have agreed to a transition window after March 2019 – even if the framework of the Brexit deal is still nebulous at best.
“Second, persistently high inflation readings out of the UK have heightened the need for a rate hike by the Bank of England.”
The Bank of England’s base rate returned to 0.5% in November, after falling to a record low of 0.25% in the aftermath of the referendum.
Experts now believe it’s highly like that this figure will rise to 0.75% next month – with the prospect of the base rate reaching 1% when the Bank of England releases its last Quarterly Inflation Report in November.
Mr Vecchio added: “Overnight index swaps have gone from pricing in a 40% chance of a 25-bps hike in May in the first week of January to an 85% implied probability of a May rate hike. Similarly, there is now a 50% chance of a second 25-bps rate hike by November 2018.”
The Bank of England’s Monetary Policy Committee is due to meet and vote on a potential interest rate rise on May 10. In March it had voted 7-2 in favour of holding the rate at 0.5%, with members Ian McCafferty and Michael Saunders arguing that rates needed to go up to reflect inflationary pressure such as wage rises.
The Pound fell from $1.49 on the eve of the referendum to $1.29 in the days after the electorate opted to leave the European Union by 52%-48%. The Pound fell further to $1.20 at the start of 2017.