Sterling Slightly Up as BoE Hike Bets Rise

Sterling edged higher to $1.325 but remained close to its weakest level in three months, as investors digested a series of hawkish comments from Bank of England policymakers, while growing expectations of further Fed rate hikes continued to support the US dollar. BoE Governor Andrew Bailey said persistently high energy prices would make it harder for the central bank to keep interest rates on hold. Meanwhile, MPC members Sarah Breeden and Clare Lombardelli also signaled that they were moving closer to supporting a rate hike, as rising energy prices increased the risk of inflation remaining above target. The warnings come at a challenging time for Prime Minister Burnham and Chancellor Healey, who are seeking to ease cost-of-living pressures while maintaining confidence in the economy ahead of the October 28 budget. Markets are pricing in roughly an 80% chance of a BoE rate hike in November, with slightly more than four 25-basis-point increases priced into the curve over the next year.

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.