The Pound remained close to a more than one-month low against a broadly firmer Dollar on Tuesday, weighed down by elevated oil prices as investors looked ahead to this week’s interest rate decisions from the Bank of England and the US Federal Reserve.
Sterling fell 0.2% to $1.347, keeping it near its lowest level since 7th August. The Dollar strengthened against most major currencies as markets almost fully priced in a Federal Reserve rate hike later this week.
Oil prices rose more than 2% to $108.20 a barrel as concerns over global supply intensified following fresh attacks on Saudi Arabia by Iran-backed Houthi forces in Yemen, while Gulf Arab states delayed planned talks with Iran.
The attacks left Saudi Arabia’s East-West Pipeline offline, fuelling fears that damage to critical energy infrastructure and key transport routes could take longer than expected to repair.
As a net oil importer, the UK remains particularly exposed to higher energy costs. The sharp rise in crude prices has heightened concerns about a renewed wave of energy-driven inflation, prompting investors to increase their expectations for further interest rate hikes, Reuters reports.
Growing expectations of a Federal Reserve rate hike have provided support for the US Dollar this week, while the European Central Bank also raised interest rates last week.
The Bank of England is widely expected to leave rates unchanged on Thursday. However, markets are fully pricing in a 25-basis-point rate increase, with a strong possibility of another hike before the end of the year, according to LSEG data.
Meanwhile, the UK labour market remained under pressure, with wage growth hovering near a six-year low, job vacancies falling to their lowest level since 2021 and hiring activity continuing to weaken.
Weakness in the labour market had been the main factor restraining expectations for interest rate hikes in response to the ongoing energy price shock. Yet markets have now shifted towards pricing in a more aggressive rate-hiking cycle.
The Bank of England is expected to announce this week that it will halt sales of long-dated government bonds, as per a Telegraph report, which have been particularly affected by the global sell-off in debt markets. The move could potentially free up additional funds for Chancellor John Healey.