Pound Sterling hit a fresh 6-month low of $1.2220 on dovish BoE and a worsening outlook

The Pound Sterling hit a fresh six-month low of $1.2220 per dollar on Monday morning, heading for a more than 3% decline in September so far, its worst monthly performance this year, on the back of the Bank of England’s pause on its rate-hike cycle.

GBP/USD pair, Daily chart

The struggling GBP/USD pair lost another 1% last week, continuing a bearish trend that began in mid-July (peaked at $1.31), after the Bank of England (BoE) held interest rates at 5.25%, bringing a pause to a series of interest rate hikes that have been in effect since December 2021 to curb surging inflation in the big island.

The British policymakers decided to pause rate hikes last Friday, which was against the market expectation of a 25-bps rate hike, adding pressure to the Sterling, a day after official data showed UK’s CPI inflation rate in August unexpectedly softened to 6.7%, down from 6.8% in July, contrary to expectations of an increase to 7.2%.

Hence, the worsening UK economic outlook (Manufacturing PMI at 44.2), the loosening labor market, and the falling business sentiment were additional confirmations for the central bankers to hold the rate steady, the BoE's policy statement showed.

The BoE-Fed monetary policy divergence has been a negative catalyst for the price of the Sterling to the U.S. dollar. Investors are currently pricing in a 75% probability that the BoE will keep the rate steady in November, while they lowered terminal rate projections to 5.25% from 5.5%.

On the flip side, the greenback is getting support from the hawkish stance of the Federal Reserve, which has warned investors that it could hike rates further, and likely hold rates higher for longer in 2024.