STERLING surged to a six-month high of $1.59 against the dollar in London yesterday, a rise of 2.36 cents, as investors bet growth in the UK would outpace that in the US which many economists fear is only months from slipping back into recession.
The pound, which also climbed to its strongest in nearly a month against the euro, was boosted by HSBC which yesterday reported a 121 per cent pre-tax profit rise to $11.1bn (£6.98bn) for the first six months of the year, providing evidence of a healthy banking sector – a key contributor to the UK economy.
Europe’s largest bank said it made a profit in every region except the US, further dampening confidence in the dollar. HSBC’s results set the tone for a stream of UK bank results this week that are expected to be positive.
Meanwhile, a report showed that UK manufacturing expanded for a tenth straight month in July fuelling optimism that the UK economy was emerging from recession faster than economists had expected.
The Markit/Chartered Institute of Purchasing and Supply (CIPS) manufacturing PMI fell to 57.3 in July, from 57.6 in June, as lower exports weighed, but still beat expectations of 57.0.
The data helped fuel the FTSE 100 to close 2.6 per cent higher at 5,397.11 – its highest close since May. It has now more than recovered the ground lost in June, when the market bottomed out at just over 4,800. The blue chip index’s rise in July, of 6.9 per cent, was its biggest monthly increase for a year.
“Sterling is in the process of a long-term re-rating. The UK had been priced for disaster given the troubles in the financial sector, but now all the reasons for hating the pound have gone,” said Societe Generale strategist Kit Juckes.
The boost to the pound was intensified by a sombre mood in the US, where Federal Reserve chairman Ben Bernanke warned: “We have a considerable way to go to achieve a full recovery in our economy.”
Michael Hewson, a market strategist at CMC Markets, said the test of sterling’s strength will come after the summer. “The pound has bounced quite significantly since the election, and if we sustain this momentum it can certainly continue. After the October spending review is another matter, however.”