Pound hits $1.30 for first time in a year after inflation dents interest rate cut hopes
The pound climbed above $1.30 yesterday for the first time in a year after higher-than-expected inflation figures dented hopes of interest rate cuts.
And it topped €1.19 versus the euro, its strongest for nearly two years, in a boost to British holidaymakers.
Elsewhere, markets were gripped by the path of interest rates across the Atlantic, where, in contrast, hopes of a cut by the US Federal Reserve are growing.
That has sent gold prices to $2,483 per ounce, a fresh all-time high.
![Soaring soars: The pound climbed above $1.30 yesterday for the first time in a year and and topped €1.19 versus the euro, its strongest for nearly two years](https://i.dailymail.co.uk/1s/2024/07/17/21/87464915-13644943-image-a-1_1721246856901.jpg)
Soaring soars: The pound climbed above $1.30 yesterday for the first time in a year and and topped €1.19 versus the euro, its strongest for nearly two years
In Britain, official figures showed inflation held firm at 2 per cent – the Bank of England target – in June.
But economists had expected inflation to fall to 1.9 per cent. And the reading for services inflation, an underlying measure that is closely watched by the Bank of England, remained at a stubbornly high 5.7 per cent.
That prompted traders to scale back expectations for a summer rate hike.
Market pricing had suggested a 50/50 likelihood of an August cut – but that sank to a just over one in three chance.
Inflation’s stubbornness was partly blamed on the ‘Taylor Swift’ effect. The Office for National Statistics (ONS) figures showed that a surge in hotel prices put the biggest upward pressure on inflation.
Economists suggested this was driven by fans booking rooms in London, Edinburgh, Liverpool and Cardiff for the US singer’s Eras tour.
But experts argued that there was still not enough evidence to justify a cut when UK interest rate-setters next meet in two weeks’ time.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said the ‘sheer magnitude’ of the services inflation figure, compared with Bank of England expectations that it would be close to 5 per cent by now, would ‘leave rate setters unsure’ about where it was heading.
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‘It’s trickier to argue interest rates need to be cut when services inflation failed to slow in June and has barely eased since February,’ Wood said.
Investec economist Sandra Horsfield said: ‘Coupled with the upside surprise in GDP growth in May, it is certainly looking less clear-cut that the Bank of England will be able to justify joining the growing number of central banks in an easing cycle.’
The European Central Bank has cut interest rates and speculation is growing that the US Federal Reserve could do so in September. That has lifted gold prices, which tend to rise as interest rates go lower.
Fed governor Christopher Waller said the time for a US cut was ‘drawing closer’, echoing sentiments this week by the US central bank’s boss Jerome Powell, who said inflation readings add to confidence on its downward path.
‘Now that rate cuts are back on the table the appetite for gold has re-emerged,’ said Daniela Sabin Hathorn, an analyst at Capital.
Gold does not produce yields for investors in the way that other assets such as share dividends or bond coupons do.
That means there is an ‘opportunity cost’ to holding it when the money invested could work more fruitfully elsewhere.
That cost is narrowed when interest rates come down, making gold more attractive.
‘This, alongside softening economic growth in the immediate future, is expected to drive gold higher,’ Sabin Hathorn said.
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