Pound eases off three-month high

pound  BATH, UNITED KINGDOM - SEPTEMBER 27: In this photo illustration, U.S. dollar bills are are pictured with a British GDP £1 coin on September 27, 2022 in Bath, England. The UK pound sterling fell to its lowest level against the U.S. dollar as concerns grew at the prospect of a surge in the UK government borrowing to pay for the multiple tax cuts, announced in Conservative Party chancellor Kwasi Kwarteng’s mini-budget. The fall in the value of sterling is also contributing to the UK's cost of living crisis, as inflation hits a near-30-year high. (Photo by Matt Cardy/Getty Images)
A stronger pound is good news for businesses and consumers and could help lower inflation. Photo: Matt Cardy/Getty (Matt Cardy via Getty Images)

The pound (GBPUSD=X) has faded from a three-month high against the dollar but remains strong at $1.20.

The pound hit $1.2095 early on Friday in London, down from $1.2125 on Thursday. Sterling slipped slightly after surging to $1.2153 on Thursday, its highest level since 11 August.

The three-month high has been driven by hopes that the US Federal Reserve is entering a phase of smaller rate hikes.

Minutes indicated that several officials backed the need to moderate the pace of rate increases as they look to tame soaring inflation and boost confidence in the US economy.

“A slower pace in these circumstances would better allow the committee to assess progress toward its goals of maximum employment and price stability,” the minutes said.

“A stronger pound feeds into a better appetite for FTSE (^FTSE) these days, even though most FTSE companies’ revenues are US dollar-denominated,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said.

The currency has managed to recover by almost 20 cents since hitting its record low in September after the chaos caused by Kwasi Kwarteng’s mini-budget. The pound hit a low of $1.035 in its aftermath, although its value had been falling prior to the economic statement in parliament, and it began to recover shortly afterwards.

Read more: Interest rates: Top Bank of England official warns further rises needed

However, it is still 12% lower against the dollar than it was at the start of 2022.

“Evidently, the pound’s recovery has been part-driven by growing international confidence that the UK is getting its spending and borrowing plans in order after the scare of September’s Budget,” Graham Smith at Fidelity International, said.

“However, a fall in the dollar has also played its part. Markets have started to price in the possibility US interest rates will peak sooner and at a lower level than was widely thought a month ago, as well as a future switch in focus from controlling inflation to providing support for a slowing US economy,” he added.

Watch: MoneyWatch: Fed hints at smaller interest rate hikes 'soon'