Sterling Slides as Inflation Looms: Currency Market Dynamics Unpacked

Sterling decreased against the dollar before the Federal Reserve meeting. UK inflation figures aligned with expectations, prompting stable market bets on the Bank of England's interest rates. Despite wage growth indicating potential rates hike discussions, the pound's future remains uncertain amidst economic divergence with the eurozone.

Sterling fell against the dollar ahead of the Federal Reserve's policy meeting Wednesday, suggesting potential divergence in U.S. monetary policy approaches. UK inflation figures matched analyst predictions, maintaining stable market expectations for the Bank of England's interest rate trajectory.

The annual rise in consumer prices hit 2.6% in November, while services inflation remained at 5.0%. Money market predictions showed little change, expecting 57 basis points of interest rate easing by the end of 2025. UK gilt yields softened, yet remained close to historical highs.

Sanjay Raja, Deutsche Bank's chief UK economist, emphasized the need for patience in addressing inflation. Meanwhile, analysts noted UK wage growth, particularly in the private sector, could influence future rate discussions. The pound eased, facing pressure from euro area yield divergences.

(With inputs from agencies.)