Sterling fell to its lowest level against the Dollar in nearly three months on Thursday and also slipped against the Euro, as investors viewed the Pound as one of the main casualties of a broader Dollar repricing following the Federal Reserve’s hawkish shift last week.
The Pound was heading for its fourth consecutive daily decline against the greenback, which was trading near two-month highs after stronger US economic data fuelled expectations that interest rates could remain higher for longer.
Sterling was down 0.10% at $1.3222 at the time of writing, its weakest level since 1st July. The Pound has lost around 1.25% since Monday, while the US Dollar index has gained approximately 0.90% over the same period.
The outlook for interest rates remained a key focus after Fed Chair Kevin Warsh indicated last week that further monetary tightening could be on the table. He also defended the independence of the US central bank despite repeated calls from President Donald Trump for lower borrowing costs.
Markets are already pricing in interest rate hikes from the Bank of England, despite the central bank continuing to signal some uncertainty over the need for further tightening, Reuters news agency reports.
Soft labour demand adds another challenge, particularly if persistently high energy prices lead to renewed pressure on households’ real incomes.
In addition, British business activity lost momentum this month, while inflationary pressures intensified, according to a survey published on Wednesday.
Bank of America said markets could be pricing in more monetary tightening than is ultimately delivered. The bank expects the Bank of England to raise interest rates only twice before beginning a cycle of rate cuts in 2028.
Money markets are currently pricing in around 100 basis points of Bank of England rate increases over the next 12 months, equivalent to four quarter-point hikes from the current 3.75% level.
Traders see about a 75% probability of a rate increase in November, shortly after the Autumn Budget, while a December hike is considered almost certain.
Furthermore, the Euro gained 0.05% to 85.98 pence, with markets pricing in roughly 100 basis points of monetary tightening from the European Central Bank by the end of 2027.