Sterling Weakens to Near Two-Month Low

Sterling weakened to $1.336, near its lowest level since late July, as investors assessed the latest developments in the Middle East alongside weaker-than-expected UK public finances. The US dollar remained supported by expectations of further interest-rate hikes from the Federal Reserve. Brent crude resumed its recent decline after reports that Iran had proposed reopening the Strait of Hormuz within seven days if Washington agrees to demands including lifting its military blockade of Iranian ports. Meanwhile, UK government data showed the budget deficit widened to £18.3 billion in August, above the £15.5 billion forecast, partly reflecting higher inflation-linked spending on pensions and benefits. Attention is now turning to next month’s Autumn Budget, with the government reportedly considering changes to its fiscal rules that would allow borrowing for infrastructure projects to be excluded.

Sterling weakened to $1.336, near its lowest level since late July, as higher oil prices and weaker-than-expected UK public finances weighed on sentiment. At the same time, the US dollar remained supported by expectations of further interest-rate hikes from the Federal Reserve. Brent crude climbed towards $102 a barrel, on track to end a four-day losing streak, amid uncertainty over oil flows and potential Middle East diplomacy. President Donald Trump is due to address the UN General Assembly later today and could meet his Iranian counterpart on the sidelines. UK government data showed the budget deficit widened to £18.3 billion in August, above the £15.5 billion forecast, partly reflecting higher inflation-linked spending on pensions and benefits. Attention is now turning to next month’s Autumn Budget, with the government reportedly considering excluding infrastructure borrowing from its fiscal rules.

Sterling remained below $1.34 as traders slightly pared back expectations for Bank of England rate hikes amid a decline in oil prices. Brent eased toward $100 a barrel after US President Trump left the door open to diplomacy with Iran, helping to reduce fears of an imminent supply shock, while stronger regional crude flows have further eased pressure on physical markets. UK policymakers made clear last week that the outlook for inflation, and therefore interest rates, will depend heavily on the path of oil and gas prices in the coming months. Markets currently price around an 80% chance of a rate hike at the November meeting, with roughly a 56% probability of a second increase by year-end. Meanwhile, investors are turning their attention to next month’s Autumn Budget, with the government reportedly considering plans to extend a new property tax to homes worth more than £1.5 million. Elsewhere, the USD remained supported by expectations of further interest-rate hikes from the Fed.