Sterling slips amid red-hot inflation, dollar holds at 32-year peak vs yen

The sterling weakened on Wednesday after hotter-than-expected consumer price inflation and fears of a deeper recession bolstered expectations of a less aggressive rate hike by the Bank of England (BoE) in November.

The US dollar held at a 32-year peak against the yen, rising from a two-week trough against a basket of major peers, and underpinned by expectations of aggressive US Federal Reserve interest rate hikes.

The British pound fell 0.6 per cent at 08.27 GMT to $1.12500, after data showing Britain's annual consumer price inflation inched up to 10.1 per cent in September, rising more than expected, and returning to a 40-year high hit in July.

Investors expect the sterling to remain under pressure amid the outlook for rising inflation and a recession in Britain, which could lead the BoE to hike by 75 basis points, rather than 100 bps at its November meeting.

“Sterling edged lower against its peers after yet another upside surprise in the latest UK inflation data ... The outlook for the UK economy remains relatively murky, with ballooning borrowing costs, soaring consumer prices and a government in chaos with its credibility shot to bits unlikely to inspire much confidence," said Matthew Ryan, Head of Market Strategy at Ebury.

“Following the budget fiasco, there is also a great deal of uncertainty as to the pace of upcoming Bank of England interest rate hikes," he added.

Money markets are pricing in a total 300 bps of BoE interest rates hikes by May, according to Refinitiv data.

The BoE said that it would start selling some of its huge stock of British government bonds from November 1, but would not (this year) sell any longer-duration gilts that have been at the centre of market volatility, in the wake of the government's "mini-budget" fiasco.

Elsewhere, the dollar pushed as high as 149.48 yen for the first time since August 1990, in early London trading. The dollar/yen pair was last up 0.1 per cent at 149.40 yen.

Traders are on high alert for the Ministry of Finance and the Bank of Japan to step into the market again, as the currency pair pushes toward the key psychological barrier at 150. A cross of 145 a month ago spurred the first yen-buying intervention since 1998.

On Wednesday, Japanese Finance Minister Shunichi Suzuki said that he was checking currency rates "meticulously" and with more frequency, local media reported.

"Intervention risk remains present, since the MOF has already crossed the Rubicon, but its purpose is surely only to limit the scale of speculative positioning, rather than driving a sustained reversal," said Sean Callow, a currency strategist at Westpac in Sydney.

Given the BOJ's position as the only developed-market central bank pursuing a negative interest rate policy, "it's hard to see why the pair wouldn't extend into the 150-155 area", Callow added.

Dollar king

The dollar index — which measures the currency against six peers including the yen, sterling and euro — added 0.46 per cent to 112.49, after dropping to the lowest since October 6 at 111.76 on Tuesday.

The greenback, which currently reigns as the safe-haven currency of choice, has sagged this week amid the bear rally in equities, globally following some upbeat earnings.

Underlying support continues to come from market pricing — for two more 75 bps hikes from the Fed this year — as it focuses on red-hot inflation, even at the risk of sparking a recession.

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Fiscal uncertainty in Britain is also clouding the outlook for markets globally.

The euro sank 0.45 per cent to $0.98175, retreating from Tuesday's high of $0.98755, a level last seen on October 6.

Economists in a Reuters poll predict another 75 bps rate hike from the European Central Bank on Thursday, next week.

The New Zealand dollar remained elevated — up 2 per cent this week — following Tuesday's blowout consumer price data, which raises expectations for continued aggressive tightening by the Reserve Bank of New Zealand. The currency last traded 0.2 per cent lower at $0.56760, close to Tuesday's two-week high of $0.5719.

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