Pound Hits Three-Month Low Amid Rising Energy Prices and Rate Hike Bets

The pound has been struggling against the US dollar and euro, reaching its lowest level in nearly three months. On Friday, it held steady around USD1.322 after falling to USD1.32 on Thursday, its lowest since June 29. The dollar is set for a second sharp weekly increase due to rising energy prices and rate hike bets.

The US Federal Reserve's decision to raise borrowing costs last Wednesday has contributed to the dollar's rally. As traders expect further rate hikes, they are pushing up yields on US bonds, making them more attractive and increasing demand for the dollar. In contrast, the Bank of England held rates steady last week but flagged the possibility of future increases if the conflict in the Middle East continues.

Currency strategist Francesco Pesole at ING believes that the pound will struggle in the coming months as it is unlikely the BoE will match market expectations for further tightening. Traders expect around 35 basis points of monetary tightening from the BoE this year and over 100 basis points by the end of 2027.