Sterling ticked up against the US Dollar on Monday as tumbling oil prices eased fears of energy-fuelled inflation and reduced expectations that the Bank of England will need to tighten monetary policy further ahead of this week’s interest rate decision.
Sterling gained 0.07% to $1.3330 at the time of writing, extending its recovery for a second consecutive session after falling to a three-week low on Thursday.
Meanwhile, Brent crude dropped 9% to $87.84 a barrel after the US and Iran halted military strikes over the weekend, raising hopes of a de-escalation in tensions. The conflict had briefly driven oil prices above $100 a barrel last week, heightening concerns over inflationary pressures.
Two-year UK government bond yields, which are particularly sensitive to expectations for near-term interest rates, fell 6 basis points to 4.362%, marking a sharper decline than comparable US Treasury and German Bund yields, Reuters reports.
The Bank of England is widely expected to keep its benchmark interest rate unchanged at 3.75% when policymakers meet on Thursday, after June inflation came in below the central bank’s projections.
Looking further ahead, however, the outlook remains uncertain. Economists and financial markets are split over the path of future rates, with higher energy costs posing a potential risk to inflation. Money markets are currently pricing in an even chance of a rate increase in September.
“If inflation is still expected to remain contained, we believe the BoE will leave rates unchanged for the rest of the year,” said ING FX strategist Francesco Pesole, going on to add that a dovish repricing remains “the clearest near-term risk for Sterling.”
Sterling also gained ground against the Euro, rising 0.2% to 84.55 pence and continuing its rebound after slipping to a more than one-year low of 84.5 pence on 15th July.
“Our short-term valuation models still suggest the pair is cheap at these levels,” Pesole said.
Investors are also weighing the UK’s fiscal outlook under the new government, following the appointments of Prime Minister Andy Burnham and Chancellor John Healey last week.
According to a Reuters source familiar with the matter, Burnham’s administration plans to maintain its predecessor’s pro-growth stance towards the financial services sector, including its approach to regulation.
The source added that Healey has kept several Treasury ministers who served under former Chancellor Rachel Reeves, signalling continuity in the government’s financial services policy.