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The pound is approaching $1.30 against the dollar for the first time in more than eight months, capping off a near 6 per cent rise this year and making up all of its losses after the currency suffered a “flash crash” back in October.
Sterling remains the worst-performing major currency in the world since immediately before last June’s referendum, down by 12.6 per cent. Still, it is trading 0.36 per cent higher against the dollar this morning – its first session of strengthening in three days – to a daily high of $1.2984.
Prospects for the post-Brexit vote pound have brightened following the UK prime minister’s decision to hold a snap general election which is expected to deliver a major boost to the Tories’ parliamentary majority on June 8. The currency is up more than 3.5 per cent against the dollar since the announcement last month and 1.2 per cent against the euro.
Today’s kick higher also comes ahead of the Bank of England’s latest quarterly “Super Thursday” when it will reveal its latest outlook on the economy, monthly interest rate decision, and minutes of its meeting.
With the BoE having moved into a neutral stance from an easing bias earlier this year, markets may be buying up the pound in expectation of any “hint of a hawkish bias in MPC comments”, says Kit Juckes at Societe Generale.
Should the pound break $1.30 today, it “would probably trigger a sharper move upwards”, adds Mr Juckes, who thinks bets on falls in the currency haven not yet “been completely expunged”.
Domestic policy factors could also prove a longer term boost for the pound. Derek Halpenny at MUFG notes Conservative party plans for an energy price cap for UK households could help contain oil-price induced inflation in the economy.
Annual consumer prices are expected to hit 3 per cent over the next 12 months largely as a result of the pound’s post-Brexit vote falls.
But as Mr Halpenny notes:
Given the drop in crude oil prices and given the appreciation of the pound since the turn of the year, the value of crude oil in pounds is dropping sharply, which means the sterling devaluation lift to energy inflation is reversing as quickly now as it jumped last year post-referendum.