The British pound surged to its highest level against the US dollar, driven by the Bank of England’s more hawkish stance compared to the Federal Reserve’s outlook at the Jackson Hole Symposium last Friday.

The pound also rose sharply against other G-10 currencies following the symposium, a key event hosted by the Federal Reserve in Wyoming to discuss central banking policies.

Against the US dollar, the pound climbed above 1.32, marking its highest level since March 2022, and strengthened against the euro, reaching over 1.18—a three-week high.

Fed Chairman Jerome Powell hinted at a potential rate cut in September, contributing to a further weakening of the US dollar.

In contrast, Bank of England Governor Andrew Bailey indicated that additional interest rate cuts would not be rushed, despite signs of easing inflationary pressures over the long term.

This more hawkish approach contrasted sharply with the Fed’s, boosting the pound’s appeal among investors.

Pound Emerges as a High-Yield Currency The pound has gained favor with investors due to expectations of higher yields compared to other currencies.

Following Governor Bailey’s speech, markets now anticipate that the Bank of England may maintain interest rates at elevated levels for a longer period, leading to a higher yield on UK government bonds compared to their US counterparts.

As of the close on Friday, the yield on the UK 10-year government bond stood at 3.91%, the highest among major central banks.

Meanwhile, the yield on the US 10-year Treasury fell to 3.78%, its lowest point this year.

Recent economic data indicates a rapid recovery in the UK economy this year, with Gross Domestic Product (GDP) growing by 0.6% in the second quarter, following a 0.7% rise in the first quarter of 2024. This represents the strongest growth in the first half of the year among G7 countries, compared to a 0.7% increase in the US and 0.3% in the eurozone.

Annual inflation in the UK also rose to 2.2% in July from 2% in June, likely deterring the Bank of England from implementing further rate cuts.

The pound has been further buoyed by the UK election in early July, with the Labour Party’s landslide victory expected to provide stability and support for continued economic growth.

Optimism surrounding government policies has made the pound particularly attractive to investors. The new ruling party has pledged not to increase taxes or National Insurance, while committing to boosting housing supply and reducing migration.

USD Weakness May Continue Amid Fed Policy Shift The US dollar is expected to remain weak this year following the Federal Reserve’s confirmation of a rate cut in September.

At the Jackson Hole event, Fed Chair Jerome Powell stated, “The time has come for policy to adjust,” marking a pivotal moment for the central bank.

Markets are now anticipating a possible deeper rate reduction of 0.5% next month, with a full 1% cut projected for the remainder of the year.

This shift in Fed policy could mark the beginning of a prolonged period of dollar weakness, putting upward pressure on other major G-10 currencies.

The pound could particularly benefit from the weaker dollar, given the Bank of England’s reluctance to implement further rate cuts. BOE Governor Andrew Bailey cautioned that “it is too early to declare victory” over inflation and warned against lowering borrowing costs “too quickly or by too much.”

Analysts expect the Bank of England to deliver only one more rate cut for the remainder of the year, following the first reduction in August.

This anticipated slower pace of rate cuts, compared to the Fed’s, could support a long-term uptrend in the pound against the US dollar.

Should this trend continue, the momentum could push GBP/USD to surpass 1.4, a level last seen in June 2021 when the Fed signaled the start of rate hikes amid surging inflation.

The US Dollar Index, which measures the dollar’s value relative to a basket of foreign currencies, dropped to 106.5 early Monday, its lowest level since December 2023.

Not only has the pound surged against the greenback, but the euro also strengthened on Friday, with EUR/USD approaching 1.2, the highest level since July 2023.