Sterling Surges Amid UK Growth, Outpacing Dollar

Sterling experienced its most impressive two-week rise against the dollar in eight months, following robust UK economic growth data. Concurrently, the Japanese yen gained strength due to likely intervention from the Bank of Japan. These movements occurred as the U.S. dollar weakened post a soft inflation report.

Sterling surged towards its best two-week performance against the dollar in eight months on Friday, driven by strong UK growth data, while the U.S. economy showed signs of slowing. In the past 24 hours, the foreign exchange market's spotlight was on the yen, which experienced its largest rise since early May following probable intervention by the Bank of Japan, coinciding with the dollar's decline after a soft U.S. inflation report.

The pound fell over 1% against the yen on Thursday as the Japanese currency broadly strengthened. Currently, it has risen 0.3% to 205.65 yen, its highest since early 2008. Against the dollar, sterling has jumped 2.4% in the past two weeks, marking its biggest two-week rise since November last year, and is now at $1.2949, making it a standout performer among major currencies today.

Data released on Thursday revealed that the UK economy grew faster than anticipated in May, causing traders to reduce their bets on an August rate cut by the Bank of England. BoE Chief Economist Huw Pill augmented sterling's momentum by noting that services inflation and wage growth remained strong, despite headline inflation meeting the BoE's 2% target in May. He suggested that June inflation figures due next week are unlikely to alter the overall outlook.

Bank of America strategists noted, "Our August BoE rate cut call, already very close, is in doubt, with the market pricing 50%." Current futures market data indicates a 52% chance of an August BoE rate cut and an 88% chance of a September cut, down from 61% and 92% a week earlier.

"Interest rate differentials are a key driver of currencies, and they currently favor sterling," said XTB research director Kathleen Brooks. "The real interest rate in the UK is 3.25%, compared to 2.5% in the U.S., which is bolstering the pound, and this differential may grow larger."