By James Caley
Last week saw Sterling under pressure on multiple fronts. UK inflation held at 3.8% year-on-year in August, remaining the highest among major advanced economies. Core inflation and services inflation eased a little but not enough to change the broader expectation that the Bank of England will stay cautious about cutting interest rates.
The Bank of England also held its interest rate at 4% last week, voting 7–2 in favour of no change. While two members preferred a small cut, the majority pointed to persistently high inflation as justification for staying on hold. The Bank also announced it would slow the pace of gilt sales under its quantitative tightening programme, a move intended to ease pressure on financial conditions.
At the same time, UK public sector borrowing came in much higher than expected, around £18 billion in August, which was well above forecasts. That raised concerns about the fiscal outlook, increasing the risk premium on UK assets and weighing on Sterling vs both the Dollar and the Euro. The UK labour market also showed signs of cooling: wage growth has slowed somewhat, job vacancies and employment gains are weakening, although unemployment remains elevated.
In currency markets, Sterling generally weakened vs the Dollar and Euro. GBP/USD fell by nearly 0.9% over the week (from highs around mid-week) as USD strength crept in, helped by expectations from the US side and risk sentiment. GBP/EUR dropped roughly 0.7% over the week, reflecting weaker Sterling plus some support for the Euro as rate-cut expectations in the Eurozone have moderated.
All told, the mix of stubborn inflation, high fiscal borrowing, and signs of labour market slowdown have created a “mixed but tilted negative for GBP” backdrop. Markets seem to be pricing in that the BoE won’t cut rates soon, but that growth risks and fiscal risks could limit Sterling’s upside.
What to Watch This Week
Given last week’s developments, this week’s data will be crucial in clarifying the path ahead for GBP, EUR, USD. Some of the key releases and events:
- UK PMIs (Services, Manufacturing, Composite) will be released Tuesday morning, these will give a first look at how economic activity is holding up. If the services PMI is strong, that may support GBP. If weak, it reinforces risk of slowdown.
- Eurozone PMI also due around the same time, softer-than-expected numbers could weigh on EUR, especially if coupled with elevated inflation or weak wage growth.
- Speech(s) from BoE officials (Bailey among others) could offer forward guidance. Tone will matter: even if rates are held, if the guidance leans dovish, Sterling might come under pressure.
- Monetary policy expectations are a cross-cutting theme: markets will be watching whether the ECB seems more reluctant to cut, and how that compares to the BoE’s outlook.
In summary, this week offers potential catalysts that could either reinforce last week’s trends (GBP underperforming vs EUR & USD) or offer a reversal if data surprises to the upside.