Pound jumps 1.2% in 17 months as traders eye tight labor market

Pound Sterling jumped 1.2 per cent to $1.2464 Tuesday.

Gilts slumped and traders added to bets that the Bank of England will raise interest rates at next month’s meeting.

The pound has been driven to depths not seen since the early months of the pandemic as U.K. policymakers grapple with a cost-of-living crisis and soaring inflation. Worries that Prime Minister Boris Johnson will break his post-Brexit trade deal because of the dispute over Northern Ireland has also cast a shadow over the currency.

UK Cost-of-Living Squeeze Intensifies With Drop in Real Wages

“People don’t need too strong an excuse to buy sterling right now,” said Geoffrey Yu, a strategist at BNY Mellon. “Even a modicum of good data or even data that isn’t as bad as previously expected can see them coming back because of valuations.”

The move accompanies a broader dollar decline, with the greenback underperforming all Group-of-10 currencies bar the Japanese yen as risk sentiment rebounded. The Bloomberg Dollar Spot Index slid 0.5 per cent, a third day of declines and the longest losing streak since March.

Still, some strategists contend that there’s plenty of good reasons to be bearish on the pound. The job numbers don’t amount to a game changer for the fundamentals of the UK economy, and inflation data is expected to show consumer prices increasing at an annual rate of 9.1 per cent in April.

“There has been a notable shift at the BOE from inflation itself to the negative growth implications of higher inflation,” said Adam Cole, a currency strategist at RBC Capital Markets. “So we expect rate expectations to reprice lower going forward.”