British Pound Under Pressure as Expectations of a 1% Rate Hike by the BoE Soar

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The British pound dropped on Wednesday as investors weighed the prospects for interest rates following the elimination of the majority of the government’s “mini-budget” as statistics revealed that rising food costs drove British inflation into double digits last month.

The pound was down 0.7 percent against the dollar at 1.12240 as of 11:30 GMT and down 0.08 percent against the euro at 87.00 pence.

According to CPI data released on Wednesday, the consumer price index (CPI) rose by 10.1 percent annually in September, dealing yet another blow to consumers already struggling with a cost-of-living crisis.

Rising UST Working Against British Pound: Colin Asher

Commenting on the pound’s outlook, Colin Asher, a senior economist at Mizuho, said:

“The UK CPI was a little firmer than expected, but the impact on GBP was limited and if anything on the downside. Rising UST (US Treasury) yields are dragging the greenback higher across the board, including against GBP.”

Following Jeremy Hunt’s cancellation of the majority of Prime Minister Liz Truss’ proposed tax cuts and shortening of her expansive energy price limit plan to six months from two years on October 17, inflation figures are contributing to the currency’s volatile week.

Meanwhile, trading firms reduced their predictions on the Bank of England boosting interest rates as a result of the budgetary plans’ U-turn.

As of today, the probability of a full percentage point increase at the upcoming BoE meeting on November 3 was 65%, according to investor pricing data. A shift of that magnitude had already been completely priced in before Monday’s U-turns.

The BoE’s plans to start selling some of its enormous collection of British government bonds, which will begin on November 1st, are another thing for market participants to take into account.

According to Stephen Gallo, the European head of FX strategy at BMO Capital Markets, “BMO currently has the bank going 100bps in November, but we can see the case for just 75bps if the Bank proceeds with asset sales and there are no further ruptures in the gilt market.”

In order to avoid conflicting with a government fiscal statement on October 31, the BoE announced it was postponing the commencement date for the implementation of its quantitative tightening policy by one day from its original schedule.