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Pound outshines rivals as UK economy holds up better than expected

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Sterling is the only major developed world currency to have strengthened against the dollar this year, boosted by signs of recovery in the UK economy after it fell into a technical recession late last year.

The pound rose 0.6 percent to a seven-month high of $1.2893 against the U.S. currency on Friday, before paring gains to end the week at $1.2857. The measures take sterling's gains to 1 percent against the dollar so far this year. The rest of the G10 group of heavily traded currencies are lower against the dollar: the euro lost 0.9 percent, the Canadian dollar 1.7 percent and the Japanese yen 4.1 percent.

Support for sterling comes as traders shift to pricing two or three 0.25 percentage point interest rate cuts by the Bank of England this year, compared with six quarter-point cuts that They were already discounted at the beginning of the year.

A relatively stable political context (with a general election later this year unlikely to upset economic orthodoxy) has also helped, analysts say.

“Suddenly the UK looks more boring compared to other countries, and boring is good,” said Athanasios Vamvakidis, global head of G10 currency strategy at Bank of America. “It means that volatility is avoided.”

Vamvakidis added that regardless of who wins the upcoming elections, “we are going to get mainstream politics.” Instead, investors face “great uncertainty” due to the November presidential election in the United States and “far-right parties rising in the polls” in Europe, he said.

Although the UK economy sank into a technical recession late last year, investors have been encouraged by recent upbeat business surveys suggesting the slowdown will be short-lived.

The S&P Purchasing Managers' Index, a measure of activity in the private sector, rose to 53.3 in February, up from 52.9 in January and the highest since May 2023. A reading above 50 indicates expansion . House prices also rose last month compared to 12 months earlier for the first time in more than a year, according to figures published earlier this month by Nationwide.

Sterling's strength “reflects 'not as bad as expected' economic performance for the UK last year and growth in 2024 is expected to be a little better,” said Jane Foley, senior currency strategist at Rabobank. .

The return to “relatively boring British politics” under Prime Minister Rishi Sunak, compared to his predecessors Boris Johnson and Liz Truss, had helped restore confidence, he added.

Despite its recent gains, the pound remains well below its post-pandemic high of $1.42 reached in June 2021.

Currency speculators, including hedge funds, have more than tripled the size of their bets on further gains in sterling against the dollar since the start of the year, according to the latest data from the Commodity Futures Trading Commission. The size of this “long” position tracked by the CFTC is now approaching a nine-year high reached last summer.

Asset managers have also become more optimistic. Michael Metcalfe, head of macro strategy at State Street, custodian of around $40 trillion in assets, said data from his firm showed investors had “rapidly reassessed” their underweight positions in sterling since the start of the year. . Investors are now in a “near neutral” position, after expectations of rate cuts were reduced more in the United Kingdom than in the United States or the eurozone.

“Sterling's resilience is primarily a carry story [investors looking for higher-yielding assets] holding on and although the UK fell into a technical recession last year, recent key economic indicators have been quite positive,” said Kyle Chapman, an analyst at forex brokerage Ballinger & Co.

This week, the Office for Budget Responsibility, the government's spending watchdog, also painted a slightly brighter picture for the UK's prospects in its forecasts, estimating the economy will grow by 0.8 per cent this year, versus to a previous forecast of 0.7 percent in November. .

Real GDP per capita, which has been declining steadily since early 2022, is expected to begin recovering later this year and return to its pre-pandemic level in 2025.

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