The pound climbed to its highest level against the dollar since June as the US greenback weakened on expectations of an interest rate hike slowdown.
The British currency touched $1.23, having bounced back from its record low of around $1.03 two months ago after the chaos of Kwasi Kwarteng’s mini-budget.
The move higher will help slightly with the current cost of living crisis as it will make imported goods less expensive.
Since the turmoil in financial markets in September, international investors took an improved view of the UK economy last month, helped by chancellor Jeremy Hunt’s autumn statement. The pound climbed from $1.1469 to $1.23 during the period.
Traders are also anticipating a slowdown in US interest rate hikes, which has caused them to shift from the dollar into riskier assets.
Since hitting a 20-year peak in late-September, the dollar has lost around 8% of its value against its major peers, having depreciated by 1.5% this week alone.
On Wednesday, Fed chair Jerome Powell signalled that monetary policy would remain restrictive for some time, and that slowing the pace of hikes would be a good way to “balance the risks”.
This could come as soon as the December FOMC meeting, he said.
However, economists are still warning that a UK recession is coming, which would have a negative effect on the pound.
The currency is also still trading much lower than its pre-pandemic level of $1.30, and its pre-Brexit referendum rate of $1.50 in 2016.