Sterling Weakens Amid Dollar Strength

Sterling extended its decline towards the $1.33 level, remaining at its weakest point since late October, as the USD continued to benefit from expectations of further Federal Reserve tightening in December. The recent slide in oil prices also lost momentum, with Brent crude stabilizing following shipping attacks in the Strait of Hormuz. Meanwhile, hotter-than-expected US inflation data reinforced expectations of another Fed rate increase in December, while raising the possibility of a 50bp hike. However, expectations of further monetary tightening by the Bank of England helped limit sterling's losses. Deputy Governor Clare Lombardelli cautioned that consecutive rate increases remained a possibility, citing persistent wage pressures and the risk of second-round inflationary effects. Markets are increasingly pricing in another rate hike before year-end, followed by a further increase by March. Investors are now turning their attention to UK third-quarter GDP report due Thursday.

Sterling slipped below $1.34 as hawkish comments from Federal Reserve Governor Christopher Waller and stronger-than-expected US inflation data boosted the dollar. This followed a recent recovery in the pound, supported by easing AI and Middle East concerns and falling oil prices, which weakened demand for the greenback and encouraged risk-taking. The dollar strengthened on Tuesday after Waller signaled the possibility of further interest rate increases, while US consumer prices rose more than anticipated in October. Meanwhile, Bank of England Deputy Governor Clare Lombardelli signaled further monetary tightening, warning that Britain's “low-hire, low-fire” labor market could make it harder to ease wage pressures. She said another interest rate increase in the near term was likely unless there was clearer evidence of easing inflationary pressures. Investors are now looking ahead to Thursday's UK third-quarter GDP report, with growth expected to reach 0.7%.

Sterling recovered above the $1.34 level, attempting to claw back last week's losses as falling oil prices eased market concerns and investors awaited key economic data due later this week. Brent crude fell towards $90 a barrel amid diplomatic efforts to resolve the conflict in the Middle East. US President Donald Trump struck an optimistic tone, saying further strikes on Iran were “highly unlikely” if negotiations over its nuclear programme and the reopening of the Strait of Hormuz made significant progress. Meanwhile, investors are looking ahead to the UK's third-quarter GDP report on Thursday, which is expected to show economic growth of a solid 0.7%, supported by strong services output. Expectations of further Bank of England rate hikes are also helping underpin sterling's appeal. Across the Atlantic, attention will turn to Tuesday's US CPI report, which could provide further clues about the Federal Reserve's monetary policy outlook and the timing of potential interest rate hikes.