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The pound stays supported into year-end, but the OECD's 2027 downgrade warns of downside risks next year.
The OECD raised its UK growth forecast for 2026 to 1.1% from 0.9% on Wednesday, a confirmation of an outperformance the pound has spent the year trading on.
The upgrade covers a year that is three quarters complete and is built largely on data already published, including the second-quarter demand that held up despite higher fuel prices.
The forward-looking half of the report went the other way, with 2027 trimmed to 1.0% from 1.1% on the drag from higher interest rates over the coming year.
Global growth was revised the same way, up to 2.9% for this year and down to 3.0% for next.
Sterling's reaction says the market had the 2026 number already, with the pound-to-dollar rate at 1.3317 on Wednesday after touching 1.3316, its lowest since 21 August.
The pound-to-euro rate is at 1.1649, holding above the 1.1615 low struck after the Bank of England's 17 September hold.
Gilt yields fell across the curve on the release, which weighed on the pound, because the OECD paired its upgrade with the judgement that UK policy is already tight enough.
"The OECD has said that the BOE can avoid raising interest rates because policy is already tight enough," says Kathleen Brooks, Research Director at XTB.
Brooks notes the OECD expects Bank Rate to stay at 3.75% well into next year, leaving the Bank free to sit out the tightening its peers are delivering.
Money markets price close to 90% odds of a November hike after three Monetary Policy Committee members voted for an immediate rise last week.
Our House View is that the pound stays capped into the 28 October Budget and recovers afterwards, with the UK's 2026 outperformance carrying sterling to a higher year-end.
The OECD's 2027 cut is a new pointer to the challenge that 2027 presents.
Sell Sterling Says Deutsche Bank
In view of mounting headwinds, Deutsche Bank turned bearish on sterling on 22 September, switching from the long stance it had held for much of 2026.
"We expect sterling to underperform other major currencies, and favour selling against a basket of EUR, USD, CHF, and JPY," says a Deutsche Bank strategy note.
Three of the pillars behind that call are the forces the OECD names for next year: elevated energy costs eroding the trade balance, higher market yields eating into fiscal headroom, and a pattern of UK data undershooting expectations into year-end.
"If tightening does materialise, the lesson from the last cycle is to expect 'dovish hikes' accompanied by currency weakness," says Deutsche Bank.
That would align with the OECD's suggestion that the Bank avoid hiking, which poses a downshift in rate expectations that would hamstring the pound.
Deutsche Bank notes sterling is already priced for a quiet Budget, with implied volatility never lower ahead of a UK fiscal event and the skew towards sterling puts far from its extremes.
Positioning of that kind pays little for the outcome our House View expects and leaves room for a repricing if the Budget disappoints.
Burnham is planning a tax giveaway, the one development that would test the quiet-Budget assumption against elevated bond yields.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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