Sterling Rebounds from Three-Month Lows

Sterling rebounded from three-month lows to trade around $1.324, supported by easing oil prices and a stabilization in global bond markets that boosted risk appetite, as investors also weighed hawkish remarks from Bank of England policymakers. Brent retreated after US President Donald Trump ruled out an attack on Iran before the November midterm elections, citing productive talks aimed at ending the conflict. Meanwhile, BoE Chief Economist Huw Pill stressed the need to keep inflation under control, while MPC member Megan Greene warned that UK wage growth could reach around 3.5% in 2027, potentially sustaining inflationary pressures and increasing the need for further rate hikes. Governor Andrew Bailey also reiterated the importance of bringing inflation down. Markets are pricing in a BoE rate hike in November, with the Bank remaining the only major central bank yet to begin tightening monetary policy in response to inflationary pressures stemming from the US-Iran war.

Sterling weakened to $1.32, close to three-month lows, as a rebound in oil prices heightened inflation concerns and reinforced expectations for higher-for-longer interest rates, pushing gilt yields to multi-year highs and weighing on UK growth prospects. Brent crude rose back above $100 a barrel as Iran intensified attacks on shipping in the Strait of Hormuz, prompting markets to price more than 100 basis points of Bank of England tightening by the end of next year. BoE policymaker Catherine Mann said Tuesday that inflation above the Bank’s 2% target appeared embedded in the economy and warned it could reach 4% around the turn of the year, when wage negotiations typically take place. Meanwhile, the dollar remained supported by expectations that the Federal Reserve will raise rates for a second time this year in December. Against the euro, sterling rose to its highest level since June last year, as concerns over France’s deepening fiscal crisis weighed on the common currency.

Sterling traded slightly above $1.32 as elevated energy costs and persistent inflation concerns reinforced expectations for UK interest rates to remain higher for longer. BoE policymaker Catherine Mann said on Tuesday that inflation above the Bank’s 2% target appeared to have become embedded in the economy. She warned that inflation could reach 4% around the turn of the year, when wage negotiations typically take place, potentially adding to price pressures. Mann has been among a minority on the MPC voting for a 25-bp rate hike to 4% since July. Meanwhile, weaker-than-expected US PCE inflation and jobs data last week strengthened expectations that the Federal Reserve could leave rates unchanged in October, with a December move now seen as more likely. In the UK, construction activity continued to contract in September, though less than expected, while builders grew more cautious about the outlook amid higher rates, inflation, weak orders and Middle East uncertainty.