Sterling Hovers Near Three-Month Low on Strong Dollar

Sterling ended the week just above $1.32, hovering near its lowest level in three months, as the US dollar remained supported by growing expectations of further Federal Reserve rate hikes this year. Investors also assessed recent comments from Bank of England policymakers for clues on the outlook for monetary policy. The US-Iran conflict and elevated energy prices continue to fuel concerns over renewed inflationary pressures, prompting markets to price in a solid probability of a 25bp BoE rate hike in November. BoE Deputy Governor Sarah Breeden said it could become “increasingly appropriate” to respond to rising inflation risks by raising interest rates. Deputy Governor Clare Lombardelli likewise said rates may need to rise if energy prices remain elevated, while MPC member Swati Dhingra, one of the more dovish policymakers, said inflation expectations were not yet a source of concern. Meanwhile, UK consumer confidence reached its highest level in more than two years in September.

The British pound weakened further toward $1.32, its lowest level in three months, as investors digested fresh comments from Bank of England policymakers, while a stronger dollar reflected growing expectations of further Fed rate hikes this year. Rising oil prices also weighed on the economic outlook. BoE Deputy Governor Clare Lombardelli said Thursday that interest rates may need to rise if energy prices remain elevated, unless there is clear evidence of a weakening economy. Last week, Lombardelli said the case for a rate increase was building, as she joined a 6-3 majority in voting to keep rates at 3.75%. Meanwhile, MPC member Swati Dhingra, one of the more dovish policymakers, said inflation expectations were not yet a source of concern. Markets continue to price in a solid chance of a 25-basis-point BoE rate hike in November. In the US, investors have raised bets on further Federal Reserve rate hikes following hawkish comments from policymakers and stronger-than-expected PMI data.

The British pound weakened sharply to around $1.325, reaching its lowest level since late June, as the US dollar strengthened following stronger-than-expected PMI data and a series of hawkish comments from Federal Reserve policymakers. The developments reinforced expectations of further monetary tightening in the US, adding pressure to sterling. Higher oil prices, amid continued uncertainty surrounding US-Iran talks, also weighed on risk-sensitive assets. In the UK, the latest PMI survey showed that business activity continued to expand in September, although the pace of growth eased slightly and fell short of market expectations. Despite the softer reading, markets continue to price in a meaningful probability of a 25-basis-point Bank of England rate hike in November.