The pound has fallen to its weakest level against the US dollar in almost three months, with investors increasingly focused on the diverging interest-rate outlooks in Britain and
the United States.
Sterling slipped to $1.3222 on Thursday, its lowest point since July 1, extending its decline to around 1.25% since the start of the week. It was also down slightly against the euro.
The latest weakness came as the US dollar strengthened broadly following a more hawkish shift in expectations for Federal Reserve policy. The dollar index has risen about 0.90% this week and is trading close to a two-month high.
Markets are also turning their attention to the Bank of England, with traders increasingly betting that interest rates will have to remain higher for longer.
Financial markets are currently pricing in around 100 basis points of additional BoE tightening over the next year. That would amount to four quarter-point increases from the current 3.75% rate.
A November rate rise is now seen as having roughly a 75% chance, while markets are placing particularly strong expectations on another increase in December.
The outlook is complicated by signs that the UK economy is losing momentum. Business activity cooled in September, while inflationary pressures increased, according to a survey published earlier this week.
HSBC foreign-exchange strategist Daragh Maher said investors were already pricing in significant tightening from the Bank of England despite what he described as a relatively cautious stance from the central bank.
He also pointed to weaker demand for labour and the risk of renewed pressure on household incomes if energy prices remain high.
There is also disagreement among financial institutions over how far the Bank of England will ultimately need to raise borrowing costs.
Bank of America has suggested that markets could be pricing in too much tightening. Its forecast points to two further rate increases before the Bank eventually begins cutting rates in 2028.
Against the euro, sterling slipped to 85.98 pence, while markets are pricing in roughly 100 basis points of European Central Bank tightening by the end of 2027.
For Britain, the pressure on the pound comes at a sensitive moment, with investors watching the Autumn Budget, inflation, energy costs and the health of the labour market for clues about the next move from Threadneedle Street.
The currency's latest slide highlights the difficult balancing act facing policymakers: containing persistent price pressures without adding further strain to an economy already showing signs of weaker growth.
