The pound sterling achieved a two-and-a-half-year high against the US dollar on Thursday 29 August 2024. The currency is also trumping the euro, but analysts cautioned that this achievement may be transient if monetary policy changes.
Currency Markets Remain Tense After Sterling’s Strong Performance
Marked as a notable recovery from its decline in 2022, when the British pound was $1.03 against the US dollar, it traded around $1.32 during the week of 26 August 2024. Analysts reportedly expect the Bank of England (BoE) to keep interest rates unchanged. Reuters cited Nick Rees, a senior market analyst at Monex Europe, who said:
We’re going to see deviations in (predictions of) easing paths being priced over time and that should lead to increased volatility.
He further pointed out that the pound’s present value hints at a growing UK economy, but this may change if the BoE cuts rates earlier than expected. The central bank reduced interest rates by 25 basis points to 5% on 1 August 2024.
A Reuters report indicated that traders are “wary of sudden sell-offs” after Japanese yen-based carry trades imploded earlier this month. As these positions unravelled, wreaking damage on “higher-yielding currencies” such as the Mexican peso and South African rand, sterling’s popularity as a carry trade option was highlighted.
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According to Reuters, three leading investment banks suggested that investors use the weaker Swiss franc to fund sterling buys. Debt-based carry trades do well when the markets are steady, but can quickly fall when volatility surfaces.
Although conditions are steadier, markets remain tense after the early August yen debacle.
