Pound Slips as Dollar Gains and BoE Hike Bets Rise

The British pound weakened to around $1.35 as the dollar strengthened, despite growing expectations for further Bank of England rate hikes amid mounting inflation concerns. Rising energy prices, alongside the ECB’s rate increase and more hawkish inflation outlook, added to pressure on UK yields. Brent crude climbed above $100 a barrel, while UK natural gas prices reached their highest level since late 2022 as escalating Middle East tensions heightened concerns over energy supplies. Markets are now fully pricing four BoE rate increases by the end of 2027, despite Governor Andrew Bailey pushing back against the view that another hike is inevitable and stressing that future decisions will depend on evolving economic and geopolitical developments. Meanwhile, the dollar strengthened further after stronger-than-expected US PPI data lifted the implied probability of a Fed rate hike next week to above 70%.

Sterling edged up to $1.355 as renewed inflation concerns reinforced expectations for further Bank of England rate hikes. Brent crude crossed $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%.