Sterling rises vs dollar after Fed; BoE in focus

Sterling rose against a weakening dollar after the Federal Reserve cut interest rates by 50 basis points, with investors awaiting the outcome of the Bank of England policy meeting on Thursday expected to keep borrowing costs on hold.

The pound briefly hit $1.3297, its highest level since March 2022, right after the Fed announcement on Wednesday. It was last up 0.35 per cent at $1.3257.

Sterling had risen on Wednesday as data showed that British inflation held steady in August but rose in the services sector, which is closely watched by the BoE, to 5.6 per cent from 5.2 per cent in July.

Money markets priced in a 20 per cent chance of a 25 basis points rate cut from the BoE on Thursday, from roughly 28 per cent right after the inflation data.

The BoE will keep its main interest rate at 5.00 per cent, but reduce it in November even though inflation is expected to stay above the central bank's 2 per cent target, a firm majority of economists in a Reuters poll predicted.

"We expect no change from either (the BoE or the Bank of Japan policy meetings), but flag the increase in dovish risks around the BoE decision as a potential catalyst for a tactical sterling pullback," said Alvise Marino, forex strategist at UBS.

The pound rose 0.05 per cent versus the euro at 84.12 pence per euro.

Analysts flagged that the BoE Monetary Policy Committee would also have more information on the fiscal outlook, with the Autumn Budget slated for Oct. 30.

"Any hint at a November move would unlikely trigger any downside in sterling, as this is currently more than fully priced in by markets," said Matthew Ryan, head of market strategy at global financial services firm Ebury.

"The vote on rates among committee members could be of greater importance to investors," he added. "A closer vote, whereby we see more of a balance between the hawks and the doves, would no doubt be bearish for sterling."

Ebury expects the base rate to remain unchanged in what will likely be either an 8-1 or 7-2 vote.