CAPITALDIGEST MARKET REVIEW, 21/09/2026

STERLING TICKS UP AFTER UK RETAIL SALES BEAT EXPECTATIONS

The pound rose slightly on Friday after figures showed UK retail sales unexpectedly rose in August, continuing a string of recent upbeat data that has ​increased pressure on the Bank of England to hike interest rates. Retail sales ‌volumes rose 0.5% from July, beating economists’ forecasts in a Reuters poll for a 0.2% fall. Compared with August last year, overall sales volumes were up by 2.4%. The pound ticked very ​slightly higher after the figures were released and was last up 0.1% ​at $1.337. It was little changed against the euro , with the single ⁠currency flat at 85.91 pence. “For now, the resilience of the economy is one ​more thing nudging the Bank of England closer to raising interest rates,” said Paul ​Dales, chief UK economist at Capital Economics. But Dales said inflation has yet to peak and that would likely slow growth later in the year. The BoE kept rates on hold at 3.75% on Thursday ​but said inflation would likely now peak above 4% early next year and ​warned borrowing costs might go up if the Iran war drags on. Bank officials raised their forecast for ‌third-quarter ⁠growth in the wake of figures earlier this week that showed output expanded at the fastest annual pace in 18 months in July. Traders in money markets were last pricing in a roughly 65% chance of a rate hike in November and anticipate ​around four 25-basis-point increases ​by the end ⁠of 2027. Despite Friday’s slight rise, the pound was set for its biggest weekly fall since June, at 1.2%, after the US ​Federal Reserve hiked interest rates on Wednesday and surprised markets ​with hawkish ⁠language that suggested more increases could be coming. Sterling fell 0.7% on Wednesday as the dollar rallied. Rising energy prices due to the Iran conflict have caused markets to raise ⁠their ​bets on rate hikes, helping drive bond yields to ​multi-year or even multi-decade highs globally. The impact on currency markets has largely been subdued, however, as bond ​yields have moved similarly around the world.

DOLLAR PAUSES AFTER FED RALLY AS YIELDS, OIL RETREAT.

The US dollar eased against the euro on Thursday, a day after logging ​its biggest jump in three months against the common currency after the Federal Reserve hiked rates and signalled further tightening. The euro ‌rose 0.1% to $1.14755, after falling 0.7% on Wednesday, its largest drop since June 17. The US dollar index, which measures the currency’s strength against six peers, was about flat on the day at 100.23 on Thursday. The dollar’s retreat on Thursday was fuelled by a pullback from Wednesday’s surge, alongside lower Treasury yields and moderating oil prices. “I think that ​the dollar moves along with US interest rates right now,” said Marc Chandler, chief market strategist at Bannockburn Forex. With Treasury yields ​easing after Wednesday’s rise, “the dollar corrects a little bit,” Chandler said. Though the Fed may have delivered on the market’s ⁠hawkish expectations for now, it might still not raise rates as aggressively as the market expects, making the dollar vulnerable to any disappointment.Markets ​remain far more hawkish than the Fed. While policymakers project one more rate hike in 2026 and a hold in 2027, investors are pricing ​in more than one additional increase this year and roughly three more by the end of 2027. “The pendulum of sentiment has swung very far,” Chandler said. A drop in energy prices helped soften the dollar as reports of additional Saudi crude cargoes through Oman eased supply concerns amid the US-led war on Iran. The greenback tends to benefit ​from higher oil prices because the U.S. economy is seen as relatively less exposed to energy shocks. Still, the dollar index remains about 1.4% higher ​than a week ago as markets have become increasingly convinced of the Federal Reserve’s resolve to tackle price pressures firmly. Sterling, meanwhile, dropped slightly against the euro and ‌the ⁠dollar after the Bank of England held rates unchanged but warned that prolonged conflict in the Middle East may require tighter policy. The British pound was last down 0.2% to $1.3354.

STERLING STEADY AFTER UK INFLATION, EYES TURN TO BoE

The British pound was little changed against the euro and the ‌dollar on Wednesday as underlying readings of UK inflation held steady in August, even as headline consumer price inflation accelerated to a five-month high. The headline consumer price index rose to 3.1% in August ​compared with a year ago, its highest level since March, official figures ​showed just a day before the Bank of England’s policy decision. But core ⁠inflation, which excludes volatile items such as food and energy prices, held at ​2.6% for the fourth month in a row. “The inflation data continues to show few signs ​of a broader increase in prices that indicates a risk of inflation persisting after the energy price shock fades,” said Andrew Wishart, senior UK economist at Berenberg. The pound was little changed against ​the dollar at $1.3471 but remains close to the one-month low of $1.3464 reached last week. Against ​the euro, the pound was flat at 85.66 pence. Markets are now turning their attention ‌to ⁠the BoE’s policy announcement on Thursday, when they are expected to keep interest rates unchanged. A surge in energy prices since the outbreak of the Iran warat the end of February pushed investors to price in tighter policy from global central banks, including the BoE. Investors ​are pricing in ​around a 20% chance ⁠of a quarter-point interest rate hike to 4%, but are fully pricing in a hike at the November meeting and see ​more in 2027. Prior to the Iran war, investors had been ​expecting the ⁠BoE to embark on a rate-cutting cycle this year. “With the labour market on the weak side, inflation not ticking up that much, and underlying inflation where it is, it should ⁠keep ​a rate hike at bay,” said Kirstine Kundby-Nielsen, senior ​FX analyst at Danske Bank. “If they end up being more dovish and not hiking, then it should ​give some room for the pound to weaken.”

DOLLAR RISES AFTER FED HIKES RATE IN BID TO COUNTER INFLATION 

The dollar rose against a basket of currencies on Wednesday after the Federal Reserve raised interest rates and flagged further ‌increases in borrowing costs in coming months. The Fed lifted the benchmark interest rate to the 3.75%-4.00% range, with new U.S. central bank chief Kevin Warsh joining a unanimous decision that effectively acknowledges the Trump administration’s inability so far to control inflation. New policy projections showed 16 of 18 policymakers anticipate at least ​one more quarter-percentage-point hike by the end of this year, with only two of them seeing rates remaining stable ​from here. Warsh apparently again did not submit a rate projection. The Fed’s new policy statement and economic ⁠projections show a central bank opening the door to tighter monetary policy through next year, with the policy rate rising to the 4.00%-4.25% range ​by the end of this year and ending 2027 at the same level. “Today’s decisive hike—supported by all FOMC members and paired with ​an upgrade in the ‘dot plot’ summary of economic projections—should go a long way toward restoring confidence in the Fed’s commitment to fighting inflation, and help remove a major headwind keeping the dollar restrained,” said Karl Schamotta, chief market strategist at Corpay in Toronto. The dollar index , which measures the currency against major ​peers, was up 0.3% at 99.961, the highest in nearly five weeks. “Today’s unanimous vote is the clearest signal yet that the Warsh ​Fed is unified, data-driven, and willing to act,” said David Krakauer, vice president of portfolio management at Mercer Advisors in San Diego. The euro was ‌0.3% lower ⁠at $1.1502. Sterling fell 0.5% to $1.34155. British inflation accelerated to a five-month high in August, a day before the Bank of England is expected to leave rates steady.

STERLING PINNED AT ONE-MONTH LOWS AS OIL STAYS HIGH, FED RATES HIKE EXPECTED

The pound was stuck at its lowest ​level in more than a month against a broadly stronger dollar on Tuesday, ‌pinned down by elevated crude oil prices ahead of this week’s interest-rate decisions from the Bank of England and U.S. Federal Reserve. Sterling eased 0.2% to $1.347, hovering near its lowest since August 7. The ​dollar firmed against most currencies on Tuesday as markets priced in a near-certain interest ​rate hike by the U.S. Federal Reserve later this week. Oil prices rose ⁠more than 2% to $108.2 per barrel as concerns over oil supplies intensified after Iran-backed Houthi ​forces in Yemen launched fresh attacks on Saudi Arabia, while Gulf Arab states postponed planned ​discussions with Iran. That left the kingdom’s East-West Pipeline offline, raising fears that damage to energy infrastructure and transport routes could take longer to repair. Britain is prone to risks from higher energy prices given its ​net oil-importer status. The spike in oil prices has led to global concerns of energy-related ​inflation, prompting investors to dial up expectations of interest rate hikes. The rising bets on a Fed rate ‌hike ⁠have supported the U.S. dollar this week. The European Central Bank also raised borrowing costs last week. The Bank of England is expected to keep rates on hold on Thursday but traders are fully pricing in one 25 basis point rate hike and a high ​chance of another by ​year-end, according to data ⁠compiled by LSEG. Britain’s jobs market remained weak with pay growth near a six-year low, the fewest vacancies since 2021 and hiring down. “The softness ​of the labour market had been the key variable holding back ​expectations for ⁠rate hikes in response to the ongoing energy cost shock. But markets have now moved to price aggressive hiking,” said Felix Feather, an economist at Aberdeen. The Telegraph reported that the BoE ⁠is ​poised to announce this week that it will stop ​selling long-dated government bonds which have been hit by a global selloff in debt markets, potentially freeing up some ​cash for finance minister John Healey.