(Reuters) – The pound hit a two-year high against the dollar on Friday, as recent signs of strengthening in the U.K. economy and dovish comments from Federal Reserve Chairman Jerome Powell pushed the greenback lower against several global currencies.
The British pound rose 0.7% to $1.3185, its highest level since overdue March 2022. It surpassed the previous 13-month peak of $1.3144.
The index, which tracks the U.S. dollar’s performance against six major currencies, fell 0.5% after Powell said “the time is now” to adjust policy and vowed to do everything he can to avoid further weakening of the labor market.
“I think the market will be really dovish initially, which will lead to lower interest rates and a weaker dollar,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Following Powell’s remarks, investors priced in a greater likelihood of a drastic 50 basis point interest rate cut at the U.S. central bank’s September meeting.
Sterling has been among the best-performing major currencies this year, gaining in the past two months after a series of better-than-expected economic data suggested the BoE was in no rush to cut interest rates.
The latest data shows that UK consumer confidence remained at almost a three-year high in August. The survey, released on Thursday, showed that business activity in the UK accelerated in August, while cost pressures fell to their lowest level in more than three years.
The latest milestone for sterling marks a change in sentiment since overdue 2022, when concerns about rising inflation and sluggish economic growth were exacerbated by then-prime minister Liz Truss’s economic plan that tested Britain’s finances.
The currency hit a record low of $1.0327 in September 2022 and has since recovered about 27%. However, it is still about 38% below its all-time high reached in 2007 before the global financial crisis.
Following Powell’s speech, the pound’s attention will turn to Bank of England (BoE) Governor Andrew Bailey, who is due to address a symposium at 19:00 GMT.
“Bailey doesn’t have to contend with aggressively dovish pricing (-39bp by year-end), but the UK still needs to gain significantly more confidence on inflation,” said ING currency strategist Francesco Pesole.
The BoE cut its policy rate to 5.00% from a 16-year high of 5.25% in early August, and market prices show that investors see at least one rate cut this year. The Fed, on the other hand, expects to cut rates by at least 25 basis points at each of its three remaining meetings this year.
The euro/sterling exchange rate fell to a three-week low, falling 0.3% to 84.66 pence per euro.
