Sterling drops against firmer dollar as markets price in a hawkish Fed

Sterling Drops as Dollar Strengthens on Fed Rate Hike Expectations

Market Reactions and Economic Factors Impacting Sterling

By Shashwat Chauhan and Javi West Larrañaga

US Dollar Strengthens on Inflation Data and Fed Comments

Nov 11 (Reuters) - The pound fell against the dollar on Wednesday, which strengthened across the board after US inflation data and hawkish comments from Federal Reserve officials a day earlier fuelled bets that the US central bank will hike interest rates next month.

Sterling eased 0.2% to $1.331, pinned near its lowest in two weeks and extending losses after a 0.7% drop in the last session. 

Dollar Index and Interest Rate Expectations

The dollar index was up for the second straight day after data showed US consumer prices increased by more than expected in October and marked a third consecutive month of upside surprises. 

The US currency firmed against most others, as traders fully priced in a 25-basis-point interest rate hike in December, with slim chances of an outsized 50-bp hike also on the cards, according to the CME FedWatch Tool. 

Other Influences on the Pound

Energy Prices and UK Economic Data

Another potential headwind to the pound could be the rise in crude oil prices on Wednesday, given the UK's status as a net energy importer. Brent crude futures were 1.4% higher on the day. 

Investors will be watching for Britain's latest gross domestic product data, due on Thursday. A Reuters survey of economists forecasts 0.7% quarter-on-quarter growth in the third quarter, which would be a pick-up from the previous period.

Bank of England Policy and Inflation Concerns

The Bank of England raised interest rates last Thursday for the first time in over three years in an almost unanimous decision. Analysts have noted that hawkish expectations from the British central bank have supported the pound lately.  

Expert Commentary and Inflation Forecasts

"There is a shift now among central bankers to being slightly more hawkish, because there's a much greater concern that if they don't nip inflation in the bud, then we could see the second-round inflation really start to take effect," said Rory Glass, an FX dealer at Marex in London.

Forecasts from a leading academic think-tank released late on Tuesday said the BoE will not succeed in returning inflation to target before 2030, driven by second-round effects on wages caused by the Iran war. 

Sterling Performance Against the Euro

Meanwhile, the pound held steady at 83.6 pence against the euro after falling for the last four sessions, the longest such stretch since early September.

(Reporting by Shashwat Chauhan in Bengaluru, Javi West Larrañaga in Gdansk; Editing by Amanda Cooper and Toby Chopra)