Sterling Gains as Markets Price More BoE Rate Hikes

Sterling edged up to $1.326 as investors priced in a more hawkish Bank of England stance amid renewed inflation pressures, while oil prices rose after President Donald Trump rejected an Iranian proposal to reopen the Strait of Hormuz and end the Middle East conflict. BoE Deputy Governor Dave Ramsden said Monday he would be prepared to raise rates if “upside pressures” on inflation persist, echoing recent warnings from Governor Andrew Bailey and Deputy Governors Sarah Breeden and Clare Lombardelli that higher energy prices could fuel a wage-price spiral. The MPC voted 6-3 earlier this month to hold rates at 3.75%, while warning inflation could peak around 4%. Markets now price in an over 80% chance of a 25bp hike in November, with roughly four hikes priced in by mid-next year. Meanwhile, Chancellor John Healey stressed the need for fiscal discipline ahead of next month’s budget, highlighting the rising cost of servicing the UK’s elevated debt burden and its impact on public services.

Sterling weakened slightly towards $1.32, close to its weakest level in three months, as investors turned to safe-haven assets amid fading optimism that progress could be made in talks between the US and Iran. The pound also remained in focus ahead of Chancellor John Healey’s first Labour Party conference speech later today, with the Budget due in around a month and details of potential policy measures beginning to emerge. Among the proposals under consideration is a revival of the Help to Buy scheme, a loan-guarantee programme designed to help first-time buyers purchase new-build homes. Meanwhile, investors increased bets on tighter Bank of England policy, pricing in an over 80% chance of a rate hike in November. BoE Governor Andrew Bailey said last week that persistently high energy prices would make it harder to keep rates on hold, while MPC members Sarah Breeden and Clare Lombardelli signaled growing support for a rate increase.

Sterling edged higher to $1.325 but remained close to its weakest level in three months, as investors digested a series of hawkish comments from Bank of England policymakers, while growing expectations of further Fed rate hikes continued to support the US dollar. BoE Governor Andrew Bailey said persistently high energy prices would make it harder for the central bank to keep interest rates on hold. Meanwhile, MPC members Sarah Breeden and Clare Lombardelli also signaled that they were moving closer to supporting a rate hike, as rising energy prices increased the risk of inflation remaining above target. The warnings come at a challenging time for Prime Minister Burnham and Chancellor Healey, who are seeking to ease cost-of-living pressures while maintaining confidence in the economy ahead of the October 28 budget. Markets are pricing in roughly an 80% chance of a BoE rate hike in November, with slightly more than four 25-basis-point increases priced into the curve over the next year.