Sterling Falls to Three-Month Low Against Dollar

The British pound fell to its lowest level in almost three months against the U.S. dollar on Thursday, September 24, as a stronger dollar and changing expectations for U.S. interest rates put renewed pressure on sterling.

Sterling fell 0.10% to about $1.3222, its lowest level since July 1, according to Reuters. The pound was also on course for a fourth consecutive daily decline against the dollar.

The move came as investors reassessed the outlook for U.S. monetary policy following stronger economic data and a more hawkish tone from Federal Reserve officials.

Dollar strength weighs on sterling

The pound’s latest decline has occurred alongside a broader rise in the U.S. dollar.

The dollar index, which measures the U.S. currency against a basket of major currencies, was holding near a two-month high on Thursday. Reuters reported that the dollar’s strength was driven by renewed expectations that the Federal Reserve could raise interest rates further.

A stronger dollar generally puts downward pressure on other major currencies because investors can obtain relatively more attractive returns from dollar-denominated assets when U.S. interest-rate expectations rise.

Sterling had already weakened considerably during the week. Reuters reported that the pound had fallen about 1.25% against the dollar since Monday, while the dollar index had gained about 0.90% over the same period.

Federal Reserve expectations have changed

The latest move reflects a reassessment of U.S. interest-rate expectations.

Stronger-than-expected U.S. economic data has raised concerns that inflation could remain persistent. That has encouraged financial markets to price in a greater possibility of additional Federal Reserve tightening.

The change in expectations has supported the dollar and pushed U.S. Treasury yields higher.

Reuters reported that a stronger manufacturing reading had renewed inflation concerns, while a poorly received U.S. Treasury auction contributed to a fresh sell-off in government bonds.

The five-year U.S. Treasury yield subsequently moved above 5% for the first time since 2007, according to Reuters.

Bank of England faces a different set of pressures

The outlook for the Bank of England is also influencing sterling.

The Bank of England has kept its policy rate at 3.75%, while markets have been pricing in substantial increases over the coming year.

Reuters reported that money markets were pricing around 100 basis points of Bank of England rate increases over the next 12 months, equivalent to four quarter-point increases from the current rate. Traders were also assigning a roughly 75% probability to a November increase.

However, expectations are not uniform.

Bank of America said markets could be pricing in more tightening than the Bank of England will ultimately deliver, while HSBC identified several factors that could continue to weigh on sterling.

The different expectations illustrate the uncertainty surrounding the UK’s interest-rate path.

UK economic data also matters

Domestic economic conditions have added another layer to the currency outlook.

A survey released this week showed that British business activity cooled during September while inflation pressures increased.

Reuters reported that weak labour demand and the possibility of another squeeze on real incomes if energy prices remain elevated were among the concerns cited by HSBC’s foreign-exchange strategist Daragh Maher.

The combination of slower activity and persistent inflation creates a difficult environment for monetary policymakers.

The Bank of England has to consider both price stability and the effect that higher interest rates could have on economic activity.

Energy prices remain an important factor

Energy prices are also influencing expectations for both the UK economy and monetary policy.

Oil prices have remained elevated amid the conflict involving Iran and continuing uncertainty around energy supplies.

Higher energy costs can increase inflation directly through fuel and utility prices and indirectly through transportation and production costs.

Reuters reported on September 24 that rising oil prices were contributing to inflation concerns in the UK and putting pressure on government bond yields.

For the pound, the effect is complicated.

Higher inflation could increase expectations of Bank of England rate increases, which can support sterling, but persistent energy costs can also weaken economic growth and household purchasing power.

Sterling is also weaker against the euro

The pound has not been falling only against the dollar.

Reuters reported that sterling edged lower against the euro on Thursday, with the euro trading at about 85.98 pence.

The euro’s strength against sterling reflects differences in expectations about European and British monetary policy.

Markets were pricing approximately 100 basis points of European Central Bank tightening by the end of 2027, according to Reuters.

Currency movements therefore reflect relative expectations between economies rather than developments in one country alone.

Why the pound matters to the UK economy

Changes in sterling can have significant effects on the British economy.

A weaker pound makes imports more expensive when measured in sterling. This can increase costs for companies that depend on imported goods, energy or raw materials.

At the same time, a weaker currency can make British exports more competitive internationally because foreign buyers pay less in their own currencies for UK-produced goods and services, all else being equal.

The overall effect depends on the structure of trade, domestic demand and the response of businesses and consumers.

Financial markets are watching the Fed and Bank of England

The direction of sterling will depend partly on how expectations for the two central banks evolve.

If U.S. economic data remains strong and the Federal Reserve signals additional tightening, the dollar could receive further support.

For the pound, investors will be watching inflation, wages, economic activity and the Bank of England’s policy guidance.

Markets will also continue monitoring energy prices because another sustained increase could influence both inflation and monetary-policy expectations.

The pound’s latest decline follows a volatile period

Sterling’s move to $1.3222 marks a significant reversal from earlier levels this month.

The pound had strengthened at various points as investors assessed UK economic data and expectations for Bank of England policy.

However, the renewed rise in the dollar has changed the balance in currency markets.

Reuters reported that the pound’s latest decline was part of a broader dollar repricing following the Federal Reserve’s more hawkish stance.

What happens next

The next major moves in sterling are likely to depend on incoming U.S. and UK economic data, central-bank communication and developments in global energy markets.

The pound’s fall to almost a three-month low does not by itself establish a longer-term trend.

For now, the immediate pressure is coming from a stronger dollar, higher U.S. interest-rate expectations and uncertainty over the UK’s own monetary-policy path.

With both the Federal Reserve and Bank of England confronting inflation risks alongside concerns about economic growth, currency markets are likely to remain sensitive to new data and policy signals.