Sterling Gains as Markets Price Further BoE Rate Hikes

Sterling edged up to $1.354 as renewed inflation concerns reinforced expectations for further Bank of England rate hikes. Brent crude briefly touched $100 a barrel, while UK natural gas prices climbed to their highest level since late 2022 as escalating tensions in the Middle East heightened concerns over energy supplies. Markets are fully pricing in a 25-basis-point BoE rate increase by December, followed by two further hikes in 2027. For the September 17 meeting, however, policymakers are widely expected to leave interest rates unchanged. Speaking to lawmakers in Parliament on Tuesday, BoE Governor Andrew Bailey pushed back against the view that another rate increase is simply a matter of time, stressing that future decisions would depend on evolving economic and geopolitical developments. Meanwhile, MPC member Megan Greene, who voted for a rate hike in July, warned that a prolonged oil-price shock could lead to more persistent inflation expectations.

Sterling was little changed just above the $1.35 mark as renewed inflation concerns supported expectations for further Bank of England rate hikes. Brent approached $100 a barrel, while UK natural gas prices climbed to their highest level since late 2022 amid renewed tensions in the Middle East and reports that Iran and Oman were nearing an agreement to manage shipping through the Strait of Hormuz. Markets are fully pricing in a 25-basis-point BoE rate increase by December and a second hike by March 2027, according to LSEG data. Investors also continued to assess the government’s commitment to fiscal discipline and restoring the UK’s credibility in international bond markets ahead of the Oct. 28 budget, alongside plans to boost regional growth by using public institutions to attract private investment. In the US, markets are awaiting key inflation data later this week, following Friday’s strong jobs report, which pushed the probability of a Fed rate hike next week to nearly 60%.

The British pound edged higher toward $1.355 as investors digested Chancellor John Healey’s first major speech ahead of the Oct. 28 budget. Healey pledged to maintain fiscal discipline and restore the UK’s credibility in international bond markets, while outlining plans to boost regional growth by using institutions including the National Wealth Fund and British Business Bank to attract private investment. Higher borrowing costs, driven by renewed inflation concerns amid the US-Iran war and uncertainty over Prime Minister Andy Burnham’s spending plans, are eroding the government’s fiscal headroom and fueling expectations of tax increases in the budget. Meanwhile, oil prices approached seven-week highs after US strikes on Iranian oil tankers. On the economic data front, UK firms increased full-time hiring in August for the first time in four years, while house prices fell year-on-year for the first time since November 2023.