Market Extra: U.K. pound rallies above $1.22 for first time since summer as market responds to less hawkish Powell

Analysts have chalked the GBP/USD rally down to multiple factors, but mostly believe it is U.S. dollar driven. The ICE Dollar Index
DXY,
-0.99%,
which tracks the dollar against a major basket of currencies, fell 0.7%.

The gains come after Fed Chairman Jerome Powell’s speech at the Brookings Institution confirmed on Wednesday much of the market’s expectations that smaller interest rate increases are due as soon as its December meeting.

He indicated that the Fed could raise interest rates by half a percentage point, bringing its benchmark rate to 4.25%-4.5% range, but balanced that with some hawkish points.

“It is likely that restoring price stability will require holding [interest rates] at a restrictive level for some time,” Powell warned. “History cautions strongly against prematurely loosening policy.”

If the Fed is easing its rate-hiking path, the pound may “get a breather,” allowing it to strengthen, Peter Iosif, senior research analyst at Noteris, told MarketWatch. “I see the case for GBP/USD to remain USD-driven mostly in the absence of any high-impact financial releases from the U.K. in the coming week as well,” he added.

Chris Turner, global head of markets for UK & CEE at ING, theorized that the U.K. pound could reach $1.23 due to the dollar being “seasonally weak” in December, or fall back down to $1.15 by the new year.

“The dollar is seasonally weak in December, meaning GBP/USD could edge up to the $1.23 area… but unless U.S. price data (including wages) falls sharply or unemployment spikes hire, we tend to think that this dollar correction has come too far too fast,” Turner explained.

He also thinks local factors could be helping the pound, such as U.K. finance minister Jeremy Hunt “stabilizing investors’ fears” over the country’s fiscal position after the September mini-budget fiasco sent bonds plunging. He noted that the U.K. 5-year credit-default swap has come down from 52bps in late September to 27bp on Thursday.

Echoing that view, Dean Turner, chief eurozone and U.K. economist at UBS Global Wealth Management, said investors are “convinced” that U.K. finances are in a more stable plane following the Autumn statement from Hunt earlier this month.

“The rally in cable is part of a more general relief rally which saw the U.S. dollar fall against most of the major crosses. Sterling is a high beta currency, when risk appetite picks up, so will the pound,” he added.

Analysts are expecting some depreciation in the pound this winter when the Bank of England is seen by many pausing interest rate hikes sooner than the Fed.

Bank of England’s chief economist Huw Pill said at a summit on Wednesday that the bank has “more to do” on raising rates to control inflation, but that it would be less than market expectations of reaching 4.6%, according to Yahoo Finance.

“Our view that the MPC will stop hiking bank rates at 4%, below markets’ current expectations, leaves scope for a further depreciation,” Gabriella Dickens, senior U.K. economist at Pantheon Macroeconomics, told MarketWatch.

“The BoE is likely to pause its rate hiking cycle sooner, and at a lower rate than the U.S. Fed. All of this leaves us reluctant to chase the recovery in sterling from here. In fact, we expect the pound to trade lower against the USD through the winter months, only recovering in the second half of 2023,” Turner said.