Sterling in longest rally since vote to leave the EU

Raft of positive data lifts hopes for growth across West as Fed chief says case for rate rise is improving

THE pound has risen against the dollar for two straight weeks amid a raft of positive UK data, rounding off its best perfomance against the greenback since the Brexit vote.

Sterling touched a three-week high of $1.3280 against the dollar yesterday after Janet Yellen, chairman of the US Federal Reserve, said the case for raising interest rates in the world’s largest economy was strengthening, but gave no indication officials could tighten monetary policy as soon as next month.

“In light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Ms Yellen said in a speech in Jackson Hole, Wyoming.

The Fed chairman stressed that future rate increases would be “gradual” and data dependent, as she reiterated that policymakers had enough ammunition to fight future downturns.

In a volatile day of trading, the pound ended the day down against the dollar after Stanley Fischer, the Fed’s vicechairman, signalled that two interest rate rises were possible before the end of the year. His comments sparked a sell-off in US shares, even as he stressed that increases would depend on the performance of the economy.

However, sterling ended the week up 0.5pc to $1.3204, after an increase of 1.2pc the previous week. This represents the first consecutive weekly gain against the greenback since May. Sterling fell to as low as $1.2879 in the wake of the vote, its lowest level since 1985. Robust retail sales and official unemployment data have lifted the pound over the past fortnight, while consumer and business surveys suggest confidence is bouncing back.

Data yesterday showed upbeat consumers are driving economic growth in Britain, Germany and the US, raising hopes that the Western world’s leading economies will continue to expand despite downbeat forecasts in the wake of the vote for Brexit. Britain’s economy accelerated in the second quarter as upbeat households splurged and manufacturers bounced back from a slump. Consumption grew 0.9pc in the three-month period while factory output rose 1.9pc.

“Households didn’t appear to be affected by uncertainty in the run-up to the referendum,” said Scott Bowman, an economist at Capital Economics. “And firms didn’t seem too worried either, with business investment rising by a quarterly 0.5pc, compared to a rate of -0.6pc in the first quarter.”

Mr Bowman said he expected growth to stall in the second half of the year, in line with many economists’ forecasts.

US figures show growth of an annualised 1.1pc in the second quarter. Financial markets believe there is a 42pc chance the Fed funds rate will be raised from its current target of between 0.25pc and 0.5pc in September, up from 32pc earlier this week. Investors believe there is a 65pc chance of a rate rise by December, up from 57.4pc just ahead of Ms Yellen’s speech.

In a separate speech, Minouche Shafik, deputy governor of the Bank of England, said policymakers were “acutely aware” of the potential negative impact of cutting UK interest rates to a record low of 0.25pc. She said the Bank’s Term Funding Scheme, which offers cheap loans to banks that lend to the real economy, would help pass the cut on to households and businesses.