Pound Holds Near July Low

The British pound was little changed at $1.337 on Friday, remaining near its weakest level since late July, as investors weighed stronger-than-expected retail sales and this week’s central bank decisions. UK retail sales rose 0.5% in August, defying expectations for a 0.2% decline and rebounding from July’s fall. Department stores led the recovery as retailers resolved stock availability issues, pointing to resilient consumer spending despite elevated energy prices and the prospect of tighter monetary policy. The Bank of England held rates steady on Thursday and said it would stop selling very long-dated gilts under its quantitative tightening programme, while warning that a prolonged Middle East conflict could prompt tighter policy. The Federal Reserve and Bank of Japan also raised rates this week and signaled scope for further tightening this year.

The British pound held just below $1.34, near its weakest level since late July, after the Bank of England kept rates at 3.75% in a 6-3 vote, and warned that rates could need to rise if inflationary pressures intensify due to the conflict in the Middle East. In prepared remarks, Governor Andrew Bailey said the global energy shock has so far had a limited impact on UK prices and wages, but warned that prolonged volatility could put greater pressure on inflation and increase the need for a rate hike. The MPC also unanimously voted to reduce its stock of UK government bond purchases to zero through a multi-year programme, with an average annual pace of £46 billion through 2034, slower than previously and below the £50 billion expected by markets. The BoE now expects inflation to reach twice its 2% target early next year, while raising its third-quarter GDP forecast to 0.4%. Meanwhile, the Fed raised rates by 25 basis points yesterday and signaled another hike later this year.

The British pound traded around $1.34, its weakest level since late July, ahead of the Bank of England’s highly anticipated policy announcement, while investors were also digesting the Federal Reserve’s rate hike yesterday. No change in interest rates is expected from the BoE today, but markets will be watching closely for any signals about the future path of policy, with a November hike still priced in, albeit with less conviction as oil prices retreat for a second consecutive session. The outlook for the Middle East remains highly uncertain, however, keeping oil prices elevated and adding to the challenge facing central banks as they try to contain inflation without putting excessive pressure on economic activity. In the US, the Federal Reserve raised interest rates by 25 basis points, the first increase since July 2023, and signaled another hike later this year, as policymakers continue to grapple with persistent inflation pressures.