Pound May Have Bottomed Out Amid Oil Price Volatility
The pound's value has been on a downward trend in recent months, but some analysts believe it may have bottomed out and could start to recover. Despite the UK's inflation rate rising to 3.1% annually in August, core inflation remains steady at 2.6%, and services inflation is still only 3.4%. While this suggests that second-round effects are not yet becoming a major concern, food-price inflation is expected to rise in the coming months, adding pressure on prices.
The labour market has also shown signs of slowing down, with vacancies falling to their lowest level in five years and wage growth moderating. This could weigh on the GBP and highlight the policy challenges faced by the Bank of England. Meanwhile, the US economy continues to show resilience despite inflationary pressures, with the Federal Reserve raising interest rates to 3.75%-4.00% in September.
The widening Fed-BoE policy divergence remains a strong argument for further GBP/USD weakness in Q4, but there is a potential reversal to this trade if the war in the Middle East ends and oil prices fall significantly. This could ease US inflationary pressures, leading to weaker rate expectations and potentially allowing GBP/USD to recover.