Sterling Loses Support as BOE's Dovish Tilt Clouds Outlook

Sterling has been losing support as investors weigh a softer Bank of England stance against expected rate increases elsewhere. The UK currency's outperformance in 2024 is fading, with markets turning to the government's first annual budget under Prime Minister Andy Burnham.

The Bank of England held its key interest rate at 3.75% throughout this year and market pricing shows low odds of a hike in September, leading investors to expect tighter policy from the European Central Bank and Federal Reserve later this month.

Finance Minister John Healey remains committed to fiscal discipline while aiming for a more even distribution of growth beyond London. The upcoming budget on October 28 poses significant political and market risks as investors scrutinize government adherence to fiscal rules amid rising borrowing costs.