The British pound is poised for its most significant monthly drop against the U.S. dollar since September 2023, trading roughly flat against the euro as markets assess major central banks’ stances on potential rate cuts. The Bank of England (BoE) has recently signaled a more cautious approach toward monetary easing, with Governor Andrew Bailey highlighting the impact of annual base effects in cooling UK inflation. Additionally, rate-setter Catherine Mann stated that inflation still has “a long way to go” before reaching the BoE’s 2% target.
Some analysts suggest that the pound’s recent stability can be attributed to its correlation with riskier assets. This link has softened the blow somewhat, despite external pressures and broader currency market movements.
Oil Prices and Sterling Performance
Oil prices dropped over $4 per barrel on Monday following concerns about Middle East stability subsiding, as Israel’s recent retaliatory strike on Iran over the weekend did not impact energy supplies. The drop in oil prices indirectly provided a brief relief for the pound. As of the latest data, GBP/USD was up 0.1% at $1.2970, though it remains on track for a 3% monthly decline, marking the steepest drop since last year.
Conversely, the U.S. dollar is experiencing its most significant rise since April 2022 due to robust U.S. economic data and a surge in U.S. bond yields, fueled by market expectations that Donald Trump could win the presidential election on Nov. 5.
Labour’s First Budget and Its Potential Impact on Sterling and BoE Policy
Investors are also closely monitoring the Labour government’s first budget announcement on Oct. 30. Finance Minister Rachel Reeves is expected to ease borrowing limits to accommodate higher public investments. This would mean greater flexibility for the government’s spending capacity, which could, in turn, affect BoE’s interest rate policy. Yields on British government bonds rose after reports of Reeves’ likely adjustment to fiscal rules, creating space for increased borrowing and potentially moderating the pace of rate cuts by the Bank of England.
Outlook and Economic Implications
According to Andrew Wishart, senior UK economist at Berenberg, Reeves’ budget proposals, alongside planned increases in minimum wages, could trigger higher costs for businesses. “With domestic demand expected to strengthen in 2025, these costs are likely to be passed on to consumers, contributing to inflation,” he explained. This scenario could further pressure the Bank of England to delay or reduce the frequency of interest rate cuts, which are currently anticipated by markets as part of a more dovish trajectory for the UK economy.
