(The July 17 article corrected the company name from BNY Mellon (NYSE:) to BNY in paragraph 7)

By Amanda Cooper and Dhara Ranasinghe

LONDON (Reuters) – The pound hit a one-year high on Wednesday, boosted by investors seeking higher returns as global interest rates fall, but strategists say it will take more than just higher interest rates to keep the pound’s shine.

Data released on Wednesday showed that U.K. inflation was more stubborn than many had expected, prompting investors to back off bets on an interest rate cut in August and sending the pound above $1.30 for the first time since July last year.

Unlike the euro and even the dollar, the pound has not been rocked by domestic politics but has been given a boost by a recent government that many hope will be able to put an end to years of unpredictable politics and volatile markets in the UK.

Growth in the UK has also started to improve. The International Monetary Fund on Tuesday raised its forecast for UK economic growth to 0.7% this year, from 0.5% in its last forecast in April.

But the reason for the recent wave of appreciation of the pound is the belief that the reduction in interest rates in the UK will take longer than elsewhere.

Many major central banks have begun to cut interest rates. The Bank of England and the US Federal Reserve are among the last dominoes standing, although the latest signals from the latter suggest that September is shaping up as the starting point for a drop in US interest rates.

“It really depends on what you think is driving the pound – is it the expectations of a BoE rate cut being pushed back or the expectations of a Fed rate cut being pushed back?” said Geoff Yu, senior macro strategist at BNY.

“The fact that the cable is trading above $1.30 and the pound sterling has risen against the euro suggests that there has been a revaluation.”

Britain’s King Charles on Wednesday outlined Prime Minister Keir Starmer’s plans to boost the economy, with a focus on building recent homes and implementing infrastructure projects.

PLACES EVERYWHERE

The pound’s gains were broad-based, weighing on the euro, which fell 0.1% to 83.93 pence on Wednesday, a two-year low.

The pound has gained 2.3% against the dollar this year, taking the clear lead among the major currencies; second-placed currency, the euro, is still down 1%.

On a trade basis, the pound has recovered all of the losses it suffered since the Brexit referendum in tardy June 2016.

So on paper the situation looks more favorable.

One of the main problems is the UK’s fiscal situation. The UK’s national debt is expected to exceed 100% of gross domestic product, and the government has little room to raise taxes or cut spending.

“We are in the most rate-sensitive market I can remember and the latest UK CPI data does not provide much optimism for a rate cut in August,” said Kit Juckes, head of currency strategy at Societe Generale (OTC:).

“I don’t think sterling will strengthen much because the economy doesn’t have much chance yet, but there is so much uncertainty in the world that the new government has provided stability (and that has helped (the pound),” he said.

The suspension of parliament in France and political upheaval in the U.S. presidential race, including a failed assassination attempt on Republican Party candidate Donald Trump and doubts about incumbent President Joe Biden’s ability to serve another four years, have added to concerns across global markets.

The Bank of England meets on August 1, with investors predicting the probability of an interest rate cut is less than 40%, down from around 50% on Tuesday.

UK interest rates are expected to be around 4.75% by the end of the year, down from 5.25% and higher than US rates of 4.50-4.75% and eurozone rates of around 3.30%.

Higher interest rates in the UK mean investors can enjoy higher yields on UK assets than in other jurisdictions, helping to strengthen the pound’s position as the dominant currency – at least for now.

“Despite the odds, we still find it difficult to see the pound strengthening more significantly,” said Commerzbank (ETR:) strategist Michael Pfister, citing uncertainty over the government’s ability to actually improve the economy and the possibility that the BoE will take a less cautious approach to interest rate cuts.

“Given these risks, we expect the pound to strengthen only modestly. However, if it becomes clearer that these risks are less likely, the pound should benefit (even more),” he said.