Sterling Slides as Oil Surge and Hawkish Fed Lift Dollar

The British pound traded little changed above $1.33, near its strongest level in almost a month, as the US dollar retreated from recent highs after Federal Reserve Chair Kevin Warsh refrained from signaling the outcome of this month’s FOMC meeting, prompting markets to scale back expectations of a Fed rate hike next week. Meanwhile, traders have modestly increased bets on Bank of England rate hikes, with four quarter-point increases priced in by July and the first potentially coming as early as November. Investors are also positioning ahead of next week’s UK budget, with several major asset managers betting that fiscal discipline will support gilts. Bond demand could strengthen further if Chancellor John Healey reassures markets that government spending and borrowing will remain under control. On the data front, London property asking prices rose 2.5% in October, marking a second consecutive monthly increase, according to Rightmove.

The British pound climbed to around $1.333 on Friday, its strongest level since September 22, after stronger-than-expected UK economic data reinforced expectations of a possible Bank of England rate increase next month. GDP grew 0.1% in August following July’s 0.4% expansion, beating forecasts of a contraction, while output rose 0.7% over the three months to August. The economy’s resilience has strengthened the case for tighter monetary policy, with markets still largely anticipating a 25-basis-point hike on November 5, although expectations have eased slightly. Governor Andrew Bailey said there was limited evidence that higher energy costs were feeding into wages and broader prices, but warned it was too early to assess the full impact. Other policymakers have urged earlier action against inflation risks. Investors are also watching Chancellor John Healey’s upcoming budget, which aims to ease household pressures while maintaining plans to reduce the deficit.

The British pound strengthened to around $1.325 after data showed the UK economy grew more than expected in August, reinforcing speculation that the Bank of England could raise interest rates next month. GDP increased by 0.1% in August, following a 0.4% expansion in July and defying forecasts of a contraction. Output also rose 0.7% over the three months to August, marking the fourth consecutive month in which growth surpassed expectations. The figures suggest that businesses have remained resilient despite elevated energy costs and high borrowing expenses. Several Bank of England policymakers are monitoring the stronger activity data, particularly as the energy shock linked to the Iran war adds to inflation concerns. Attention now turns to Chancellor John Healey’s first budget on October 28, which comes amid tight public finances and market volatility. While the IMF has welcomed the government’s plans to reduce the deficit, pressure remains to ease household cost-of-living strains.