Pound Faces Further Pressure as Divergence Widens
The pound sterling has been on a downward trend against the US dollar, reaching a three-month low. Despite a modest recovery in July and August, the GBP/USD pair fell by over 2% in September.
The decline can be attributed to the strength of the US dollar, which staged a powerful recovery in September. The pound also weakened against other major currencies, including the Japanese yen, Australian dollar, and Canadian dollar.
However, there is still a risk that the pound could fall further as the policy divergence between the Federal Reserve and the Bank of England widens. This divergence supports the US dollar and could put pressure on the GBP/USD pair in Q4.
The UK's inflation rate rose to 3.1% in August, its highest level since March, due to higher energy prices. The Bank of England's near-term inflation forecast suggests that CPI inflation will rise to around 3.7% in Q4 2026 and 4.2% in Q1 2027.
The UK labour market has shown signs of slowing down, with vacancies falling to their lowest level in five years and wage growth moderating. This could weigh on the pound and highlight the policy challenges faced by the Bank of England.