Sterling strengthens against dollar as chances of Fed ‘skip’ rise

The pound rose on Thursday, benefiting from a drop in the dollar as Federal Reserve members said the central bank would forego a rate hike this month, while UK statistics portrayed a picture of an increasingly bleak economy.

According to Bank of England (BoE) data, British lenders authorised fewer mortgages in April than in March, and the value of new loans also declined, underlining the housing market’s downturn.

Separately, mortgage provider Nationwide reported earlier that UK house prices fell by the highest since 2009 in the year to May, and the country’s property market faces additional headwinds following a recent increase in borrowing costs.

The pound fell by 1% against the dollar in May, its largest monthly slide since February’s 2.8% loss, but it’s still up 3.1% so far in 2023. Against the euro, sterling gained 2% last month – the most in a month since last July. But analysts say this apparent show of strength is something of a mirage.

Britain has the slowest growth and the highest inflation within the Group of Seven economies. The BoE, which many believe was too slow to raise interest rates, will probably have to raise rates again this month, which in theory should give the pound an edge against the dollar.

UK inflation fell to 8.7% in April from a peak of 11.1% in October, while U.S. inflation is down to 4.9%, from 9.1% last June – when UK inflation was at 9.4%.

Since then, the BoE has raised rates by 350 basis points to 4.50%. The Fed, meanwhile, took just seven months from that time to raise rates by the same amount and U.S. rates are at 5.25%.

“The gap (between headline and core CPI) that I have in my country is more persistent than the gaps that we see in either of my neighbours, the U.S. or the euro area,” Mann said in a policy discussion hosted by Swiss asset manager Pictet.