Sterling Takes a Hit as BoE Hike Bets are Diallyed Back

Sterling slipped against both the US dollar and the euro as traders scaled back their expectations for Bank of England rate hikes. The focus has shifted to Jackson Hole, where Fed Chair Kevin Warsh is set to speak, and the UK's upcoming fiscal signals. Markets are now pricing less than a full quarter-point Bank of England hike by year-end, with 24.7 basis points of tightening expected by December.

The two-year UK government bond yield dropped to about 4.36% as the pound fell to $1.3578 and 85.75 pence per euro, according to Reuters. When traders expect fewer UK rate increases, the 'extra interest' investors earn from holding pounds versus other currencies shrinks.

This reduction in carry advantage can pull down short-dated gilt yields and remove some support for sterling, as fewer global investors are paid to park cash in the UK. The pound is now more reliant on upcoming catalysts, including comments from Fed Chair Kevin Warsh at Jackson Hole, which could shift expectations for US rates.

The UK's October budget will also be crucial, with investors looking for details on how the Andy Burnham government plans to fund policies. Bigger borrowing needs can raise concerns about UK debt and push up the risk premium investors demand.