Sterling volatility squeezes amid uncertainty over interest rate outlook

The Pound Sterling has found intermediate support amid global uncertainty over the interest rate outlook. The GBP/USD pair finds an intermediate cushion, but the broader bias remains bearish as investors expect policy divergence between the Fed and the Bank of England may not vanish this month.

BoE policymaker Swati Dhingra warned that current monetary policy is sufficiently restrictive and that more hikes could hurt the UK economy. The narrative of keeping interest rates steady in coming months got support from BoE Governor Andrew Bailey, who conveyed that the interest rate peak is near. Higher wage growth due to labor shortages has been a driving factor in stubborn UK inflation.

Potential risks of economic turmoil in the UK region increase as the service sector contracts for the first time in the past seven months, while the Manufacturing PMI has remained below the 50.0 threshold for a lengthy period. Bank of England policymaker Swati Dhingra said this week that further policy tightening would hurt the economy. While UK economic prospects start faltering due to restrictive monetary policy, solid wage growth is still a concern for the central bank.

BoE Governor Andrew Bailey commented this week that the central bank is near to pausing its tightening cycle, but interest rates will remain higher for a longer period. A monthly survey conducted by the Bank of England (BoE) Decision Maker Panel (DMP) showed that UK businesses reported year-ahead Consumer Price Index (CPI) inflation sharply lower at 4.8% in August vs. 5.4% projected in July.

For an in-depth understanding of current labor market conditions, investors will focus on the July Employment report, which will be published next Tuesday, September 12, at 06:00 GMT.