Pound hits two-year high on dollar, gains on euro

LONDON (Reuters) – Sterling reached a two-year high against the dollar on Tuesday, and also gained on the euro, supported by bets the Bank of England will cut rates less dramatically than the Federal Reserve while the British economy outperforms the euro zone.

The pound rose as high as $1.3246, its highest since March 2022, and was last up 0.25% at $1.3222.

The dollar has been under pressure in August as traders become more confident of significant Federal Reserve rate cuts this year, and the pound has been one beneficiary.

Markets are now priced for 100 basis points of cuts across the Fed’s three remaining meetings this year, compared with around 40 basis points for the BoE – though the BoE did cut rates in August.

Bank of England governor Andrew Baileysaid on Friday at the Kansas City Fed’s annual economic conference in Jackson Hole that further interest rate cuts would not be rushed because it was still too soon to be sure inflation was beaten.

In contrast, at the same event a few hours earlier Fed chair Jerome Powell said that “the time had come” for the U.S. interest rate cuts.

“There was certainly a more cautious tone to the speech from Bailey in contrast to Fed Chair Powell’s speech,” said Derek Halpenny, head of research global markets EMEA at MUFG, in a note to clients.

Also in the mix is British inflation, which has slowed to around the BoE’s 2% target, despite stickiness in services prices.

“The faster drop in inflation coupled with the expected caution from the BoE leaves the BoE with the expected most attractive real policy rate across G10 by the middle of next year and this fact will continue to act as a support for the pound,” Halpenny said.

He added that MUFG would adjust its sterling forecast higher.

The pound also gained on the euro, with the common currency last down 0.27% at 84.45 pence, its lowest since Aug. 1.

Analysts at UBS said that they thought British domestic economic developments would be supportive for the pound as opposed to “still-subdued European economic data”.

They have a 83 pence target for the pair by year-end.

(Editing by Alex Richardson)