Sterling extends three-day slide as dollar rally pressures UK currency

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Sterling slide as dollar rallies

Highlights

Sterling falls for a third consecutive day to around $1.328, down 0.45%, as the dollar strengthens broadly against major peers.
Money markets price UK interest rates a full percentage point above the current 3.75% for next year, with a 65% chance of a November Bank of England hike and December fully priced.
S&P Global UK Services PMI drops to 51.7 in September from 52.5 in August, marking a three-month low and missing expectations.

Dollar strength and UK rate expectations

As reported by Reuters, the pound falls for a third straight day, with sterling trading around $1.328, down 0.45% on the session as the U.S. currency gains broadly against major peers.

Oil futures drop below $99 a barrel again, but that does little to support sterling as investors focus on signs that Middle East supply is slowly improving and on growing optimism over a possible diplomatic breakthrough between the U.S. and Iran.

Money markets show traders expect UK rates to be about a full percentage point above the current 3.75% level at this time next year, implying four quarter-point increases over that period. Markets also price roughly a 65% chance of a Bank of England rate rise in November, just after the Autumn Budget, while a December increase is seen as fully priced.

Business activity slowdown adds pressure

UK business activity growth cools in September while inflation pressure builds, creating an awkward backdrop for finance minister John Healey before his first budget in October.

The S&P Global UK Services Purchasing Managers' Index falls to 51.7 in September from 52.5 in August, marking a three-month low and coming in below the 52.0 reading expected by economists polled by Reuters.

Matthew Ryan, head of market strategy at Ebury, says Britain's economy has remained resilient so far this year, but a slowdown during the rest of the year looks increasingly likely as energy costs rise, borrowing costs increase, the jobs market weakens and political uncertainty returns ahead of budget day next month.

Ryan says those factors are likely to keep sterling under pressure in the near term, although he adds that the currency appears somewhat oversold at current levels.

In our earlier article on oil prices edging lower as Saudi Arabia restored flows via its East-West Pipeline, we explained how improving Middle East supply and tentative U.S.-Iran diplomatic signals were easing fears of disruption and pushing crude benchmarks back toward the $100 mark. We also noted that rising U.S. crude inventories added extra downward pressure, reinforcing the market’s shift toward a more constructive supply outlook.

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