Sterling experienced a decline on Wednesday as traders adopted a cautious approach, carefully analyzing data from Tuesday that revealed a surprising trend: UK inflation remained at 6.7% in September. This unexpected stability raised concerns among traders about the potential for another increase in interest rates.
Nicholas Rees, an FX market analyst at Monex Europe, observed that sterling had been responding sensitively to global risk conditions recently. He pointed out that worries about a possible energy price surge due to the Middle East crisis were adding pressure on the pound.
Additionally, the market eagerly anticipated remarks from Federal Reserve Chair Jerome Powell at 1600 GMT. Fiona Cincotta, senior financial markets analyst at City Index, explained that sterling was declining for the third consecutive day against the dollar due to the strength of the U.S. currency, driven by safe-haven flows. The expectation arose from the fact that U.S. Treasury yields had reached a 16-year high, leading many to believe that the Federal Reserve would maintain higher interest rates for an extended period.
On the domestic front, traders continued to analyze recent wage and inflation data. The consumer price figures, which surpassed expectations, were juxtaposed against data indicating a slowdown in the growth of British workers’ regular pay and a decline in job vacancies. The softer labor market conditions increased the likelihood that the Bank of England would keep rates unchanged at its next meeting, while the inflation figures had the opposite effect.
Commenting on the situation, Rees noted, “The slight shortfall in the wage data contrasts with a minor outperformance in inflation. However, both indicate signs of diminishing inflationary pressures. Given the high standards set by BoE speakers for restarting rate hikes, we believe this round of data does not significantly influence the decisions of either the MPC or the pound.”
Market indicators suggested an 82% probability that the Bank of England would maintain its rates in the upcoming November meeting.
Looking ahead, the focus shifted to the release of UK retail sales data for September, scheduled for Friday. Additionally, the market anticipated a preliminary assessment of October’s business activity in the coming week. These upcoming reports were poised to provide further insights into the economic landscape, potentially influencing sterling’s trajectory in the days to come.