Pound on track to strengthen against dollar

JACK BARNETT

POUND STERLING could end 2023 at its highest level in more than a year, strengthened by the Bank of England continuing to hike interest rates and the Federal Reserve taking its foot off the brake, analysts told City A.M.

The UK’s currency may strengthen to $1.30 toward the end of this year, driven by traders piling into UK assets to capitalise on higher returns.

Bank of England economists are tipped by financial markets to send interest rates to at least 5.25 per cent, which would set the UK’s official borrowing rate apart from the US's and Europe’s.

Fed chair Jerome Powell is expected to lead the central bank into pausing its tightening cycle at its meeting next week and potentially begin cutting borrowing costs from a range of five per cent and 5.25 per cent later this year.

Inflation has eased to its lowest level in a year in the US to 4.9 per cent, ushering in the start of the traders fleeing the dollar to hunt out profits in other assets. European inflation has fallen to 6.1 per cent, raising expectations of just one more rate rise to 3.5 per cent from the European Central Bank.

A “multi-year [US dollar] bear trend from 3Q onwards once US activity and particularly US price data starts to decisively turn lower” is on the way, Chris Turner, global head of markets and regional head of research for UK and CEE at ING, told City A.M.

“We think GBP/USD could grind up towards the $1.30 area by year-end purely on the dollar story,” he added, which would take the pound to its highest level against the greenback since April 2022.

So far in 2023, sterling has risen more than two per cent against the dollar to just over $1.23, making it one of the advanced world’s top performing currencies. The euro is down marginally against the dollar this year. However, in the background, debt rates have been spiralling as inflation proves much harder to tackle than expected.

Core inflation rose to 6.8 per cent in April and the headline CPI rate fell slower than projected to 8.7 per cent.

That has prompted traders to bet Bank governor Andrew Bailey and co will keep hiking rates, helping the pound, though analysts warned such a move by the central bank could actually hurt sterling.

throughout 2022.

Dealmakers have been unsettled by wild market swings sparked by the wake of war in Ukraine, while rapid interest rate hikes by the Bank of England to tame soaring inflation have made debt financing deals for firms more expensive.

Rob Baxter, head of corporate finance at KPMG in the UK, said that “confidence is king” and volatile economic conditions had unsettled investors, but added that “deals are still getting done”.

Paragon Bank shares surge on record profits

CHRIS DORRELL

SHARES in Paragon Bank surged nearly eight per cent yesterday morning after the FTSE 250 lender reported record interim profits and significant deposit inflows.

In the first half of the year, Paragon’s underlying profit jumped 22 per cent to £128.9m as the bank benefitted from rising interest rates.

The bank's net interest margin (NIM), the difference between what it pays out and receives in interest payments, widened to 2.95 per cent. This helped its net interest income to jump to £212.4m from £175.2m last year.

Paragon upgraded its full year NIM guidance to around 3.0 per cent, signalling further gains to come.

The pound is caught in a bit of a bind at the moment. Bank of England officials are poised to jack up interest rates to at least 5.25 per cent, financial markets reckon. That could mean the Bank surpasses the Federal Reserve in its tightening cycle. It’ll certainly take it much further ahead of the European Central Bank. Such a move would normally support sterling by making it more attractive to buy UK assets.

But, if the Bank goes too hard and fashions an unnecessary recession, traders may not want anything to do with the currency.

Raising rates aggressively while its peers are pausing is an implicit admission by the Bank that the UK is suffering a stickier inflation problem – also not good news for the pound.

JACK BARNETT

New mortgage lending in the period was 19 per cent higher than the first half of last year. Paragon specialises in loans to professional landlords. It upgraded its guidance for full year mortgage lending to between £1.75bn and £1.9bn. Paragon raised its interim dividend by 17 per cent and also announced an additional £50m buyback.

Chief executive Nigel Terrington told City A.M. he was “really pleased with the results”.

The bank's deposit base grew by £11.9bn with the lender saying there was "no disruption to deposit gathering from the events in the US".