The British pound soared to its highest point against the US dollar in a year on Wednesday, driven by investor expectations that UK interest rates will remain elevated for an extended period. The surge in the pound’s value came after recent data revealed that inflation was proving to be more persistent than anticipated by some economic analysts. Consequently, traders significantly reduced their expectations for a reduction in interest rates in August, pushing the pound above the $1.30 mark for the first time since July of the previous year.

Furthermore, the British currency has been bolstered by the prospect of economic stability under the new Labour government. Higher interest rates in the UK typically lead to an increase in the value of the pound, as it attracts more foreign investment, thereby increasing demand for the currency and elevating its value relative to other currencies.

In response to these developments, currency markets have begun to bet on UK interest rates remaining high for a longer duration. The UK’s inflation rate remained steady in June, aligning with the Bank of England‘s target rate of 2%. However, certain underlying measures of inflation, which are closely monitored by the Bank’s rate-setters, continue to be stubbornly high. For instance, the inflation rate in the services sector remained unchanged at 5.7% in June, while core inflation, which excludes the more volatile components such as energy prices, held steady at 3.5%.

Although some central banks, including those in Switzerland, Sweden, and Canada, have already implemented rate cuts, the Bank of England and the US Federal Reserve have yet to follow suit. On Tuesday, the International Monetary Fund (IMF) revised its economic growth projections for the UK upward to 0.7% for this year, up from the 0.5% forecasted in its previous global outlook in April. However, the IMF cautioned that the UK is experiencing a “persistence of inflation,” which may necessitate keeping interest rates “higher for even longer.”