Sterling Nears Three-Month Low

Sterling slipped towards $1.32, hovering near its lowest level in more than three months, as rising oil prices and renewed inflation concerns weighed on sentiment. Brent crude touched $107 a barrel following a deadly attack on Riyadh’s airport, while Ukraine reported further Russian strikes on its energy infrastructure. Higher energy costs have strengthened expectations for BoE tightening, with markets pricing in four rate hikes over the next 12 months. However, many analysts consider this overly aggressive, as several policymakers already view the current 3.75% rate as above neutral. Meanwhile, investors remain cautious ahead of Chancellor John Healey’s Budget later this month. The Institute for Fiscal Studies has warned that the government needs to find £35 billion to meet its spending commitments, fueling speculation over potential tax increases. Markets are now awaiting US inflation data and this week’s IMF-World Bank meetings for further policy clues.

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 crude retreated as Middle East supply concerns eased, while Wednesday's US inflation data will be closely watched for clues about the Federal Reserve’s future monetary policy. In the UK, 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.