Sterling is back on the slide

The pound has hit a five-month low against the US dollar. Sterling was trading at $1.24 this week after data showed that the UK’s unemployment rate has risen to 4.2%, says Anna Pruchnicka on Reuters. A cooling labour market eases the way for interest-rate cuts. In turn, the prospect of lower yields on sterling-based assets prompts currency traders to sell the pound. It has been on shaky ground since the 2022 minibudget sent it to a record low of $1.035 against the greenback, says Shreyas Gopal of Deutsche Bank. But the “bond vigilantes” who toppled Liz Truss are unlikely to return this year.

The 2022 crisis was triggered by external vulnerabilities. In August 2022 Britain was spending a staggering 4% of GDP on net energy imports, compounded by expensive, open-ended government promises to cap prices. Investors also considered the Bank of England “behind the curve” on interest-rate rises. Yet energy prices have fallen steeply over the past 18 months and the Bank of England is no longer an outlier. The Bank is unlikely to rush into big rate cuts, which should provide support for sterling, says Peter Kinsella in the Financial Times. The UK’s “perennial current account deficit” is at least improving. British stocks are “one of the last value pockets in the major economies”, which could eventually spark an inflow of foreign capital too. “Whisper it”, but “sterling may be in for a period of decent appreciation.”