Sterling Set for Losses as Inflation and Middle East Tensions Weigh
The British pound's three-week winning streak may be coming to an end due to conflicting forces affecting its value. A softer inflation reading and the deteriorating Middle East conflict have investors reassessing their positioning ahead of the central bank meeting next week.
Despite trading marginally higher on the day at $1.3318 against the dollar, sterling is set for losses of 1% for the week should current levels hold. The currency has retreated after hitting its highest since May last week.
Rate-hike expectations are clashing with questions surrounding the fiscal outlook, creating a difficult balancing act for the Bank of England. Traders are pricing in at least one rate hike by the BoE, but investors are still waiting for clarity on new Prime Minister Andy Burnham's fiscal plans.
A cautious tone on inflation risks may offer some support to sterling, while any indication that policymakers are leaning towards a prolonged pause could weigh on its value. TD Securities economists suggest that current inflation dynamics should be consistent with most MPC members remaining on hold, implying that the pound rally in July was overdone.