Sterling Struggles: UK Inflation Eases Amid Global Currency Shifts

The pound nears three-month lows against the dollar, influenced by easing UK inflation data. Despite the Bank of England's cautious interest rate cuts, the market speculates on potential further reductions. Analysts predict the pound's vulnerability in light of changing global economic policies.

The British pound hovered around a three-month low against the U.S. dollar on Wednesday, following a sharp decline due to new data indicating reduced inflation in the UK.

Sterling dropped 0.1% to $1.2795, reaching a low of $1.2719 earlier on Tuesday, as data showed British workers' regular pay experienced the slowest growth in two years during the third quarter. This supports the Bank of England's stance that inflationary pressures will continue to ease. Consequently, the BoE lowered interest rates last week for the second time since 2020, warning that the Labour government's first budget could drive inflation and economic growth higher.

Persistent inflation in the UK has led the BoE to reduce rates at a slower pace compared to eurozone and U.S. central banks, resulting in the pound's stronger performance against major currencies this year. However, sterling could be at risk if markets anticipate additional rate cuts by the BoE. Currently, traders see only a 15% probability of a 25-basis-point rate cut in December. ING FX strategist Francesco Pesole noted that the risk leans toward a dovish market adjustment, potentially impacting sterling negatively, though any rate repricing is expected to be gradual.

(With inputs from agencies.)