Pound touches highest since June

The pound has hit its highest level since late June, despite concerns about the UK economy, and political instability in Westminster.

Sterling hit $1.23 against the US dollar on Thursday, having bounced back from its record low of around $1.03 set two months ago.

During November, the pound climbed from $1.1469 to around $1.23, as international investors took an improved view of the UK economy after chancellor Jeremy Hunt ripped up the mini-budget.

The other side of the coin, though, is that the dollar has weakened as traders anticipate a slowdown in US interest rate hikes:

James Athey, investment director atabrdn, explains:

“Sterling has been one of the biggest beneficiaries of the market’s latest attempt to price an immaculate pivot from the Fed – growth and inflation soft enough to allow an easier Fed, but not so soft that it’s evidence of real economic stress. This has seen yields coming down and the Greenback giving back some of the significant gains for the year. Risk assets have reacted with typical, if ill-advised, gusto and so risk facing currencies like pound sterling have rallied strongly.

“Of course, domestic factors have played a part, as a semblance of institutional credibility has returned to the shores of Blighty via a renewed conservatism among the Conservative Party and finally a long-overdue 75bp hike from the Bank of England.

But…. Athey warns that the pound could weaken against the US dollar, as the economic outlook deteriorates:

The reality is that a recession is coming, and a Fed rescue is coming less quickly than in recent years. We see that reality as a coming cold shower for buoyant risk markets and as ever we expect the dollar to benefit from the resultant flight to quality.

With the UK economic outlook being even worse, this portends an unhappy