Sterling hits two-year high as rate cut hopes to cool

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Sterling rose to its highest level against the dollar since March 2022 on Tuesday as investors braced for the Federal Reserve to start cutting rates faster than Britain’s central bank.

Sterling rose 0.4 per dollar to $1.3246 as traders digested the diverging outlooks from Federal Reserve Chairman Jay Powell and Bank of England Governor Andrew Bailey at a summit of US central bankers, at the end of last week. The gains put sterling on track for its best monthly performance against the dollar since November.

Powell said “the time has come” for US interest rate cuts, but Bailey struck a more cautious tone warning it was “too early to declare victory over inflation”.

“The stark contrast between Powell’s rate cut green light and Bailey’s more cautious stance on Jackson Hole is a good summary of what’s supporting the pound’s strength,” said Kyle Chapman, currency analyst at FX brokerage Ballinger Group. referring to last week’s summit.

The divergent outlook comes as investors expect the Fed to cut interest rates by seven or eight-quarters of a point by the end of the year, with traders split on whether the first cut next month will be 0.25 or half a percentage point.

Meanwhile, the BoE made its first interest rate cut in more than four years earlier this month, but traders are betting on just four more by the middle of next year.