The pound often correlates positively with global equity markets and other risk-sensitive assets, as the UK economy is open and heavily reliant on global trade and financial flows.
However, this relationship can weaken during UK-specific developments.
Some analysts recently flagged that the British currency had now recovered all the losses incurred in the run-up to last year’s budget, benefiting from the reduction in UK fiscal and political risks.
The pound was flat at $1.3500 against the dollar, after hitting $1.3567 on Tuesday, its highest level since September 18.
The greenback was roughly unchanged on Wednesday as investors awaited key U.S. economic data later in the session.
“Barring any surprises here, we think that the pound/dollar pair could trade around the 1.35 level for now, as markets weigh up the possibility of another Bank of England rate cut as soon as its March meeting,” said Matthew Ryan, head of market strategy at Ebury, mentioning the next economic data as a possible trigger.”Sterling has caught a bid against the dollar as markets unwind modest safe-haven flows amid a remarkably sanguine reaction to the Maduro ousting over the weekend,” he added.
Markets fully priced in a BoE rate cut and a 60% chance of an additional easing move by year-end.
Traders expect the European Central Bank to keep rates unchanged through early 2027.
The euro was flat at 86.60 pence. It hit 86.44 pence on Tuesday, its lowest since mid-September.
“(Sterling recent outperformance suggests) speculators are continuing to exit the short positions built in the approach to the UK’s November budget,” said Jane Foley, senior forex strategist at Rabobank.
“This may have a little further to run near-term, though the release of monthly UK November GDP data on January 15 should provide fresh direction,” she added.
