Sterling Gains Slightly Ahead of BoE Decision

The British pound edged higher to $1.35 as investors weighed stronger-than-expected UK GDP data ahead of next week’s Bank of England policy decision. UK GDP grew 0.4% month-on-month in July, beating forecasts, while growth over the three months to July also held at 0.4%. Markets expect the BoE to leave rates unchanged next week after Governor Andrew Bailey said on Tuesday that future decisions would depend on economic and geopolitical developments, pushing back against the view that another rate hike is inevitable. Still, markets are fully pricing four BoE rate increases by mid-2027 as the recent oil price rally kept inflation concerns elevated. In the US, the dollar remained supported by growing expectations of a Federal Reserve rate hike next Wednesday following stronger-than-expected core inflation data and signs of a resilient labor market.

The British pound stabilized around $1.35 on Friday as investors digested stronger-than-expected UK GDP data and growing expectations for further Bank of England rate hikes. UK GDP grew 0.4% month-on-month in July, surpassing forecasts, with services leading the expansion. Over three months, growth matched the prior period at 0.4%. Meanwhile, the recent energy price rally paused, although Brent crude remained close to a four-month high and UK natural gas prices hovered near a three-and-a-half-year high, adding to concerns over renewed inflationary pressures. Markets are now fully pricing in four BoE rate increases by the end of 2027, though Governor Bailey has noted recently future decisions depend on economic and geopolitical conditions. The dollar, meanwhile, edged higher ahead of a key US CPI report due later today. Stronger-than-expected US producer price data released on Thursday boosted expectations of a Federal Reserve rate hike next week.

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%.