By Stefano Rebaudo
(Reuters) -Sterling was little changed versus the dollar and the euro on Tuesday as investors awaited British inflation data on Wednesday which could provide additional clues about the Bank of England policy path.
While investors were becoming increasingly aware that it will take time to clarify the trajectory of the U.S. economy as U.S. agencies clear a backlog of data, British inflation figures are likely to affect expectations for future BoE cuts.
“Short covering aside, the pound remains very vulnerable, particularly if the October consumer price index data comes in lower, in line with consensus forecasts,” said Kit Juckes, forex strategist at SGCIB.
“Our economists expect the core to remain at 3.5%, but that might not be enough to prevent the market’s confidence in a December rate cut hardening further,” he added.
Many central banks have largely completed their normalisation cycles, but traders expect the BoE to cut rates by 59 basis points by December 2026, compared with 54 bps late on Monday, while pricing in an 80% chance of a rate cut next month.
Analysts noted that the quick rise in Gilt yields last Friday did not coincide with a weaker Sterling. This could imply that the pound’s recent weakness has had more of a cyclical component than one to do with fiscal concerns, at least for now.
London stocks tumbled on Friday as gilt yields surged following reports that the UK government had abandoned plans for income tax hikes in the upcoming budget, severely undermining investor confidence in the government’s ability to meet fiscal targets.
British Finance Minister Rachel Reeves is expected to need to raise tens of billions of pounds to meet her fiscal targets in November 26’s annual budget.
The British government is likely to repeat tax rises next year, Franklin Templeton head of European fixed income David Zahn said on Tuesday, adding that long-term gilt yields could rise towards 6%, as concern mounts about UK government finances.
The euro was up 0.05% at 88.12 pence, having traded as high as 88.64 pence on Friday, its highest since August 2023.
The euro <EURGBP=> has gained on the pound for the past four weeks in succession.
Versus the dollar, sterling was flat at $1.3153.
(Editing by Ed Osmond)
