Sterling has been trading against the dollar at levels not seen since September last year – hitting $1.32 at the close of trading in London.
Market analysts cited two major factors for Monday’s rally: the sustained weakening of the dollar and the closure of trading positions at the end of the day in London – exacerbated by the fact it was the end of the month.
Sterling settled around $1.3191 – up more than half a cent on the day – with the dollar on course for its worst month since January against a basket of international currencies.
Participants are fretting that the US central bank will find it tough to raise interest rates again this year, having also expected an infrastructure stimulus plan, promised by President Trump, to have materialised by now.
While the waiting has continued, the pound – which collapsed in value in the wake of the Brexit vote – has enjoyed some support of late on growing expectations of a UK interest rate rise.
There has been backing on the monetary policy committee for a rise in rates to help combat soaring inflation but pressure for a rise was recently eroded by figures showing a fallback in the annual pace of price growth.
Investors are now said to be watching the Bank’s so-called “super Thursday” this week for a hint on when record-low interest rates could be lifted back to their pre-Brexit vote level of 0.5%.
Societe Generale currency strategist, Alvin Tan, said: “There is a genuine debate in the bank (over raising rates)… but were not expecting any hikes in the next year.
“There’s clear evidence, in our view, that the economy is slowing down, and although inflation is on the high side, momentum seems to have ebbed.”
So if the markets are not expecting a UK interest rate rise, with current betting for Thursday at a one in 20 chance, the reason for the pound’s rally is being seen very much as a story of dollar weakening.
Neil Wilson, senior market analyst at ETX Capital, said: “Clearly it’s all to do with Donald Trump saying it was too strong and the market having confidence in him…more likely it is the exact opposite – concerns about the chaos in Washington and a complete lack of faith in the administration delivering any kind of meaningful economic or fiscal reforms.”