Image © Pound Sterling Live
The pound could fall after Thursday's hike in a sell-the-fact move, but Pound Sterling Live expects any weakness to be shallow.
The pound is exposed to a sell-the-fact move after Thursday's expected Bank of England hike to 4.00%, as Governor Andrew Bailey is unlikely to validate the three further hikes markets have priced beyond it.
The pound has rallied into the event in a manner consistent with a hawkish outcome: the pound-to-dollar exchange rate trades at 1.3488, its strongest since August, and the pound-to-euro rate at 1.1984, a fraction below the 1.20 level it tested last week.
Investment bank analysts agree with the market pricing for a hike on Thursday, so the Committee's guidance on further moves will decide the pound's reaction.
"The BoE's 'active hold' has run its course," says Henry Cook, Senior Economist at MUFG, who expects a 7-2 vote in favour and a further 25 basis points in February to a terminal rate of 4.25%.
Markets price around 100 basis points of Bank of England tightening over twelve months.
"We would be surprised if only one hike were to prove enough," says a weekly research note from UniCredit, the Italian investment bank, which pencils in a second move in February 2027.
"Market pricing of around four hikes by mid-2027 still looks rich to us. It would require more concrete evidence of broadening inflation risks," says MUFG's Cook, who expects some of the tightening to be reversed later in 2027 if second-round effects stay contained.
The 100 basis points markets price over twelve months looks "somewhat overblown" given signs that consumers and companies are already turning, says a note from Wealth Club, the investment platform.
Bailey said in Bangkok last month that second-round effects from the energy shock remained subdued, and MUFG frames Thursday's hike as insurance against broadening price pressures.
Above: GBP's rally could suffer a temporary setback if the Bank of England cautions on future hikes.
Pushback against rich market pricing would typically be expected to weigh on sterling in the near-term. Should the Bank hike while declining to endorse the market's path, something that might be interpreted as a 'dovish hike' the pound would fall as traders price out part of the tightening they expect.
However, a retracement in Bank of England pricing should be seen as a minor headwind to the currency at this point, provided other currencies face similar headwinds: pricing for the Federal Reserve and European Central Bank are also priced rich.
Pound Sterling Live continues to hold a constructive medium-term view on the pound's prospects; the economy is performing well, the Budget passed without incident and the euro is undermined by French fiscal stress.
The risk to the view is that UK data must start to disappoint.
“Higher inflation and slow pay growth will likely intensify the squeeze on household budgets over the winter. With mortgage rates up since the start of September and job opportunities limited, we suspect that consumers will become more cautious too,” says Andrew Wishart, Senior UK Economist at Berenberg, who expects real consumer spending to flatline in the fourth quarter and the first.
Were this to happen, Pound Sterling Live would cool its bullish stance on the domestic currency's outlook for 2027.
