Keep calm and carry sterling

By: Admin

LONDON, Feb 12 (Reuters) - The U.S. dollar is very much in the driving seat of the foreign exchange market right now, but there is another currency reeling in yield-hungry traders just as the Federal Reserve and a raft of other central banks prepare to cut rates: the pound.

British consumers, businesses and politicians might be feeling gloomy about the prospect of UK interest rates remaining high for quite a bit longer than elsewhere - not least because inflation has proven much stickier.

But for currency traders, it is a boon. At 5.25%, UK rates are among the highest in the Group of 10 (G10) major economies, bar those in New Zealand and the United States, at 5.5%.

The Bank of England is adamant that inflation is too far above its 2% target to risk a premature cut, and data this week, if in line with expectations, is unlikely to move the dial.

Meanwhile, investors are preparing for the Fed to possibly cut as early as May, along with the European Central Bank, while across emerging markets, the rate cycle has already tilted towards cuts.

Buying a low-yielding currency to invest in a higher-yielding one - known as a carry trade - is a long-established way to exploit differences in interest rates and with its higher-for-longer sheen, the pound is a clear target.

"Sterling is very much benefitting from carry. It's one of the best-performing carry trades in the G10 because our interest rates are expected to stay higher for longer," XTB research director Kathleen Brooks said.

The pound accounts for roughly 13% of daily turnover in the foreign exchange market, compared with about 1.7% for the kiwi, according to the latest data from the Bank for International Settlements.