British Pound: Can rate hike bets sustain GBP gains as upside appears limited? - BBH

Sterling’s gains against major currencies reflect firmer expectations of BoE tightening following the UK’s August labour market data, according to BBH’s Elias Haddad. The figures strengthen the case for a 25 bps Bank of England (BoE) rate increase to 4.00% on November 5, with employment and unemployment readings outperforming the central bank’s projections and wage growth pointing to persistent services inflation. Haddad nevertheless sees a potential headwind for the Pound, arguing that the BoE may not need to raise rates as much as markets anticipate.

Can BoE tightening expectations sustain the Pound’s gains?

"GBP is up against most major currencies. UK August labor market data reinforced the case for a BoE 25bps policy rate hike to 4.00% on November 5."

"In the three months to August, the employment rate increased +0.2ppt to 75.3% while the unemployment rate decreased -0.2ppt to 4.7%, suggesting more people are finding work. The unemployment rate is the lowest since July 2025 and tracking below the BoE’s Q3 projection of 5.0%."

"The policy-relevant private sector regular pay growth matched consensus and the BoE’s Q3 projection at 3.0% y/y vs. 2.9% in July. But wage growth also suggests services inflation will remain sticky well above the bank’s 2% target."

"The swaps curve implies 95% odds of a November BoE rate hike and 100bps of tightening in the next twelve months. In our view, the BoE may not need to tighten as much as markets anticipate, which is a headwind for GBP."

"The UK economy is operating below capacity, the policy rate is near the top of the BoE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive following the October 28 UK budget."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)