FX.co ★ Sterling Holds Above $1.32 as UK Inflation Concerns Persist

Sterling traded just above $1.32 as elevated energy prices and ongoing inflation concerns strengthened expectations that UK interest rates will remain higher for longer. Bank of England policymaker Catherine Mann said on Tuesday that inflation above the Bank’s 2% target appears to have become embedded in the economy. She warned that inflation could approach 4% around the turn of the year, when wage negotiations typically occur, potentially intensifying price pressures. Mann has been among a minority on the MPC consistently voting since July for a 25-basis-point rate increase, to 4%.

At the same time, weaker-than-expected US PCE inflation and labor market data last week have bolstered expectations that the Federal Reserve will leave interest rates unchanged in October, with any potential move now seen as more likely in December. In the UK, construction activity remained in contraction in September, though by less than anticipated. However, builders have become increasingly cautious about the outlook amid higher borrowing costs, elevated inflation, weak order books and heightened uncertainty related to the Middle East.