Sterling Falls as Safe-Haven Dollar Demand Rises

Sterling fell to $1.34 after briefly breaking above $1.35 earlier this week, its highest level since mid-September, as a global tech selloff triggered renewed demand for the safe-haven US dollar. Sentiment toward AI stocks deteriorated amid concerns that a Democratic sweep in the US midterm elections could usher in tighter regulation and curb the industry’s rapid expansion. Meanwhile, markets continued to digest the implications of the Bank of England’s policy decision on Thursday. The BoE raised interest rates for the first time in more than three years, with Governor Andrew Bailey indicating that further increases may be required unless the war in Iran comes to an end. In response, investors have ramped up expectations for further monetary tightening, with three additional rate hikes now fully priced in by November 2027. The central bank also warned that inflation could peak at 4.9% in Q2 2027, while its adverse scenario envisages a sharper rise to 6.2% in Q3.

Sterling appreciated to $1.347, its strongest level since mid-September, after the Bank of England raised its key interest rate by 25 basis points to 4%, marking its first increase in more than three years. The vote was split 8-1, with Catherine Mann dissenting in favour of a larger 50 bps hike. Governor Andrew Bailey signaled that further rate increases may be necessary unless the Iran war is resolved, which would help ease the inflationary pressures that prompted the latest hike. Markets have since increased their bets on further monetary tightening, with three additional rate increases now fully priced in by November 2027. The BoE also warned that inflation could peak at 4.9% in the second quarter of 2027, while its adverse scenario projects a sharper rise to 6.2% in the third quarter of next year. Meanwhile, the pound remained supported by broad US dollar weakness, with the greenback falling to a one-month low following a sweeping Democratic victory in the US midterm elections.

Sterling extended its recent gains to trade at $1.347, its strongest level since September 15, as investors dumped the US dollar following a sweeping Democratic victory in the midterm elections, with Democrats securing control of both chambers of Congress. The unexpected political shift weighed on the greenback, while AI stocks and cryptocurrencies also declined amid concerns over tighter regulatory scrutiny. Meanwhile, the pound found additional support from expectations that the Bank of England will resume monetary tightening on Thursday, with markets widely anticipating the first interest rate hike since 2023. Mounting inflationary pressures stemming from the Iran war, alongside signs of resilience in the UK economy, have strengthened the case for higher borrowing costs. However, policymakers are expected to push back against market expectations of several additional rate increases next year.