Markets price in less than two 25bp cuts in 2026
|The UK PMIs of business activity covering the month of December were revised lower from the initial estimates, and the general tone of the admittedly second tier data released last week was largely downbeat. Sterling underperformed somewhat relative to most other European currencies, particularly the euro, as the relief rally following November’s Autumn Budget appears to have now almost entirely evaporated.
A handful of critical economic data releases in the next couple of weeks could be key for the pound, as they are likely to be important in shaping expectations for Bank of England policy.
Thursday’s monthly GDP data is seen showing no growth at all that, if confirmed, would raise fears of an outright contraction in Britain’s economy in the fourth quarter of last year. Next Tuesday’s labour report will arguably be of even greater significance, as this could tip the balance either in favour or against a March rate cut from the MPC.
So far, investors are paring their bets on Bank of England cuts, and now expect less than two full 25bp moves in 2026. Relatively high rates should, we think, continue to support the pound this year.
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