Key Points
Sterling Decline: The pound is set for a monthly drop of around 3% against the dollar, marking the largest fall since September 2023.
BoE’s Caution: Bank of England officials adopt a cautious stance on rate cuts amid inflation concerns.
Dollar Strength: Strong U.S. economic data and election bets drive the dollar's rise, pushing it toward its highest monthly gain since April 2022.
Labour’s Budget: U.K.’s first Labour budget on October 30 could impact BoE's rate strategy and inflation outlook.
Bond Yields: Higher British bond yields suggest limited BoE rate cuts in the near future.
Sterling’s Sharp Decline Against the Dollar
The British pound is on course for its largest monthly fall against the U.S. dollar since September 2023, recording a 3% drop so far in October. Sterling’s value has also slipped slightly against the euro, trading at around 83.33 pence per euro. This decline is partly due to the BoE’s cautious stance on rate cuts as inflation concerns linger, as well as a strengthening U.S. dollar driven by robust economic data and rising bond yields.
Bank of England’s Cautious Rate Path
Bank of England (BoE) officials displayed caution on monetary easing, with Governor Andrew Bailey highlighting base effects as a factor in cooling inflation. Interest rate-setter Catherine Mann echoed this sentiment, saying that inflation has yet to reach the BoE’s 2% target. These stances indicate the BoE’s careful approach in managing inflation and point to a slower pace of rate cuts.
Market Anticipation for the Labour Budget
The U.K.’s first Labour government budget, expected on October 30, is likely to influence the currency’s trajectory further. Finance Minister Rachel Reeves is reportedly planning substantial borrowing provisions to stimulate the economy, although analysts note that this could pressure inflation. According to Andrew Wishart, senior U.K. economist at Berenberg, “These policies could lead to higher prices, adding inflationary pressures, which might slow the BoE’s planned rate cuts.”
Rising Dollar and Market Influences
The dollar’s strength has been a significant factor in sterling’s recent downturn. Strong economic data and market speculation over Donald Trump’s potential win in the upcoming U.S. presidential election have driven bond yields higher. The dollar is set to close October with its most significant rise since April 2022, outpacing other currencies and creating additional headwinds for sterling.
