Sterling's sloth-like rise from its early-September low near 1.3475 toward today's 1.3566 high has come as fiscal concerns ebb on softening long-end yields, and broad USD selling against other major currencies — but the recovery looks fragile and may leave the pound trailing as other major central banks shift to more hawkish tacks.

This recent ascent can largely be attributed to the unwinding of long USD positions, driven by a persistent global inflation narrative that has bolstered hawkish expectations for central banks across developed markets. However, this macro shift poses a risk of sidelining sterling in comparison to its peers.

Despite sterling being one of the higher yielding currencies, the pivot to a tighter monetary policy by the Fed, ECB, BoC, and even the traditionally cautious BoJ could see the pound lagging, as the Bank of England (BoE) maintains a relatively static policy stance.

While UK inflation remains stubbornly high, with July's headline figure rising to 2.9% from 2.6% in June, the BoE's cautious approach to tackling inflation may disadvantage sterling against other G7 currencies.

Additionally, growth concerns stemming from high borrowing costs are choking off investment and consumption, contributing to increased fiscal anxiety. UK long-end yields have surged to multi-decade highs, raising questions about Prime Minister Andy Burnham's fiscal strategies ahead of the upcoming UK Autumn Budget in October.

As the central bank meeting cycle unfolds, with a fully priced ECB hike and 60-80% odds for rate increases from the Fed, BoJ, and RBA, sterling faces a 12% chance for a BoE hike, according to LSEG's IRPR. While a BoE hike is anticipated by year-end, the recent GBP/USD gains may face headwinds as other central banks potentially act sooner.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)