Pound Stabilizes as Dollar Weakens

The British pound stabilized around $1.35, pausing its recent selloff and hovering near a two-week low, as a sharp rally in the yen weighed on the US dollar and easing oil prices provided some relief. The yen strengthened on rising expectations of a Bank of Japan rate hike and the possibility of official intervention, prompting broad-based dollar weakness. Meanwhile, Brent crude retreated from six-week highs after US President Donald Trump said the renewed US military campaign in Iran would not last long. Sterling nevertheless remains under pressure from concerns over energy-driven inflation, higher interest rates and the UK’s fiscal outlook, despite Prime Minister Andy Burnham’s efforts to reassure markets of the government’s commitment to fiscal discipline. Markets are now fully pricing in a Bank of England rate hike by year-end, with another increase expected by March 2027.

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.