Sterling in focus as central banks diverge on monetary policy
Daily Currency Update
Sterling will come into primary focus this week as a number of key data points will take centre stage with central bankers starting to diverge on monetary policy across the major currencies.This week’s UK data releases - wage growth and unemployment on Tuesday, followed by inflation figures and the Bank of England’s interest rate decision on Thursday - will provide clearer insight into the economy’s trajectory and offer a guide for GBP direction in the lead-up to November’s budget.
UK wage growth, expected at 4.7% year-on-year, will be closely watched for any signs of easing. Elevated earnings growth, alongside persistent service inflation, has been a key barrier preventing the Bank of England from cutting interest rates. Any slowdown would give the Bank greater confidence that price pressures could begin to ease next year.
The employment picture appears less encouraging, with another decline anticipated in the PAYE measure of employment change. National Insurance and minimum wage increases continue to weigh on UK businesses, limiting job creation.
On Thursday, inflation data and the Bank of England’s rate decision are set to land simultaneously, heightening their importance. UK CPI for August is forecast to remain steady at 3.8%, in line with the Bank’s expectations but still well above the 2% target. Policymakers will be hoping for signs of softer price momentum.
Rates are widely expected to remain on hold. However, the tone of Governor Andrew Bailey’s guidance and the subsequent reaction of sterling will be closely followed. The Bank is likely to maintain a cautious, data-dependent stance, which could lend some support to the pound.
Key Movers
With monetary policy divergence now expected among the major central banks, sterling may enter a period of consolidation against the dollar. GBP/EUR, meanwhile, has remained relatively stable but could turn more volatile toward the end of the year.Last week’s softer-than-expected US inflation print reinforced expectations of a series of Fed rate cuts, which could weigh on short-term US yields and the dollar’s growth outlook.
While markets have largely priced in these cuts, the risk of lower interest rates alongside persistent inflation remains. A dovish pivot, coupled with concerns over the Fed’s independence, could undermine confidence in the dollar further.
The Fed is likely to use this window to support a slowing economy and weakening labour market by reducing rates. However, given ongoing tariff pressures, many analysts believe substantial easing would be required - with as much as 150bps of cuts priced in by January 2027, which would return the Fed Funds rate to its ‘neutral’ level of around 3%.
Expected Ranges
- GBP/USD: 1.3480 - 1.37 ▲
- GBP/EUR: 1.15 - 1.1630 ▼
- GBP/AUD: 2.0280 - 2.0520 ▼
- EUR/USD: 1.1680 - 1.1765 ▲