Sterling Rebounds as Tighter Bank of England Policy Anticipated amid Inflation
Market Movements and Policy Expectations
By Samuel Indyk
Sterling Performance Against Major Currencies
LONDON, Sept 28 (Reuters) - The pound rebounded from multi-month lows against both the dollar and the euro on Monday as investors priced in tighter monetary policy from the Bank of England as inflation pressures build.
Sterling was last up 0.1% against the dollar at $1.3259, rising from a three-month low of $1.3204 hit last week. It was still on track for a fall of over 2% this month as the dollar has rallied sharply on expectations for tighter policy from the Federal Reserve.
Against the euro, the pound was up 0.2% at 85.75 pence after touching its weakest level against the single currency since July 1 on Friday.
Bank of England Policy Outlook
BOE Expected to Tighten
The BoE has so far refrained from tightening policy while other central banks, including the Fed and the European Central Bank, have responded to energy-induced inflation pressures by raising interest rates.
Impact of Energy Prices
Oil prices rose more than 3% on Monday, while benchmark British natural gas prices rose by a similar amount after US President Donald Trump rejected an Iranian proposal to reopen the Strait of Hormuz and end the war in the Middle East.
Rising energy prices and a generally more hawkish outlook from BoE rate-setters have pushed investors to price in tighter policy from next month.
Statements from Bank Officials
BoE Governor Andrew Bailey said on Friday that persistently high energy prices would make it harder for the central bank to leave interest rates on hold. Deputy Governor Dave Ramsden said on Monday that if upside inflation pressures continue building, there could be a case for increasing interest rates.
Market Reactions and Projections
Money market futures are pricing in an 85% chance of a quarter percentage point interest rate hike at the November meeting to 4%, with four hikes priced in by the middle of next year.
"For sterling, a rate hike could provide near-term support, especially if accompanied by stabilisation in UK rates," said Roberto Cobo, head of G10 FX strategy at BBVA.
Fiscal Policy Developments
Upcoming Budget and Government Initiatives
Focus in Britain is slowly turning to the government finances ahead of the Autumn Budget on October 28.
Labour Party Conference and Economic Signals
Finance minister John Healey is scheduled to deliver a speech at the Labour Party's annual conference on Monday, where he is expected to signal that the route to boosting growth and reducing unemployment and cutting the welfare bill will stem from new jobs created by investments in sectors like defence.
Housing Market and Foreign Flows
Shares in Britain's homebuilders rallied sharply on Monday after the government said its new equity loan scheme called "Your First Home", a revival of the previous "Help to Buy" scheme, would be confirmed in next month's budget.
That could also be helping the pound on Monday, according to ING FX analyst Francesco Pesole, who said the jump in homebuilder stocks could be attracting unusually large foreign flows.
(Reporting by Samuel Indyk; Editing by Emelia Sithole-Matarise)