Sterling Slides to Two-Week Low on Risk Aversion

The British pound fell to $1.35, hovering near a two-week low, as investors moved away from riskier assets amid concerns over the economic impact of the energy shock triggered by renewed hostilities in the Middle East. Meanwhile, investors digested Prime Minister Andy Burnham’s speech to the House of Commons, in which he reaffirmed the government’s commitment to fiscal responsibility and reducing debt, while saying the early budget date was intended to curb speculation. Chancellor John Healey is expected to deliver his first major speech in the role as soon as next week. Markets continue to price in a 25-basis-point BoE rate hike by year-end, with expectations reinforced by accelerating UK shop-price inflation. In the US, markets are pricing in a 66% probability of a September Fed hike following hawkish remarks from Fed Chair Kevin Warsh and higher oil prices.

The British pound fell toward $1.35, its weakest level since August 19, as renewed risk aversion driven by higher oil prices weighed on the currency, while hawkish signals from the Fed continued to support the US dollar. Brent crude rose as renewed hostilities in the Middle East heightened concerns over further disruptions to regional energy flows. Markets are now pricing in a 25bp BoE rate hike by year-end, with a November increase seen as almost 70% likely and a second hike by February 2027 priced at around 80%. Rate expectations were further reinforced by the latest British Retail Consortium report, which showed UK shop-price inflation accelerating to its highest level in two years. At the same time, Fed Chair Kevin Warsh said inflation has not slowed meaningfully and that the Fed still has “work to do,” prompting markets to price in a 68% probability of a September rate hike.

The British pound fell toward $1.35, its weakest level since August 19, as hawkish Fed remarks supported the US dollar, while lower Brent crude prices eased UK inflation concerns and pushed expectations for the next BoE rate hike into 2027 from late 2026. In his first major speech since becoming chair in May, Warsh warned that inflation has not meaningfully slowed and said policymakers need clearer evidence that underlying price pressures are easing; otherwise, the Fed still has “work to do.” Meanwhile, LSEG data showed markets pricing around 24 basis points of BoE tightening by December and 36 basis points by February 2027. UK inflation rose to 2.9% in July, driven by higher household energy bills, and is expected to climb further toward year-end. However, the labor market has remained subdued, which could make the BoE more cautious about tightening policy in the near term.