Sterling Slips as US-Iran Talks Lose Momentum

Sterling weakened slightly towards $1.32, close to its weakest level in three months, as investors turned to safe-haven assets amid fading optimism that progress could be made in talks between the US and Iran. The pound also remained in focus ahead of Chancellor John Healey’s first Labour Party conference speech later today, with the Budget due in around a month and details of potential policy measures beginning to emerge. Among the proposals under consideration is a revival of the Help to Buy scheme, a loan-guarantee programme designed to help first-time buyers purchase new-build homes. Meanwhile, investors increased bets on tighter Bank of England policy, pricing in an over 80% chance of a rate hike in November. BoE Governor Andrew Bailey said last week that persistently high energy prices would make it harder to keep rates on hold, while MPC members Sarah Breeden and Clare Lombardelli signaled growing support for a rate increase.

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.