Sterling Tries to Recover

Sterling hovered around $1.323, trying to recover from recent lows, as investors weighed a pause in the oil price rally against persistent inflation concerns and the prospect of interest rates remaining higher for longer. The pound also drew some support from the IMF’s upward revision to its UK growth forecast, with the economy now expected to expand by 1.3% this year, compared with the 1.0% projected in July. On monetary policy, hawkish Bank of England policymaker Megan Greene argued that stronger-than-expected economic growth and a resilient labor market indicate that interest rates may need to remain higher than the current 3.75% to bring inflation under control. Markets are currently pricing in four rate hikes over the next 12 months, although many analysts consider these expectations excessive, noting that several policymakers already view the current policy rate as above its neutral level.

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.