Sterling Eyes Central Bank Week as Fed and BOE Face Tough Calls: Sterling Update

This week's Federal Reserve meeting, scheduled to announce its interest rate decision at 7pm BST on Wednesday, has been marked by a plethora of conflicting data. The August Consumer Price Index (CPI) figures, released on Friday, continued to show subdued core inflation, leaving the Fed with a challenging situation. The conflicting data provided no clear picture of the US economy, labor market, or inflation pressures.

The preliminary September University of Michigan consumer sentiment figure, also released on Friday, recorded another sharp decline in sentiment, which could potentially lead to weaker retail sales for the remainder of Q3. Despite market forecasters' expectations of the Fed standing pat, Bloomberg interest rate probabilities assign an almost 90% chance of a hike.

The US dollar may struggle for advancement this week, particularly if the Fed defies market pricing and decides to maintain current rates. The Bank of England (BOE) meeting concludes on Thursday at midday. The market forecasts no change in interest rates, while Bloomberg interest rate probabilities estimate roughly a one-in-five chance of a hike.

Labour market data for July and August, along with August CPI figures, will be released ahead of the BOE decision, which could prompt a shift in rate hike probabilities. There are signs that the UK labor market may be set to improve, following a strong July UK activity outturn driven by strength in services. However, weakness in average earnings will continue to be a focus, potentially squeezing disposable incomes.

Unless headline inflation rises above 3% and core inflation remains steady at 2.6% y/y, following the BOE decision, developments elsewhere may still support a stronger GBP against the USD and other major currencies.