BoE rate hike odds rise as Sterling outperforms

Aside from the dollar, the pound has been the best performing currency in the G10 in the past month. This continues to puzzle us given that we do not think that the political risk premium has eased to the extent that would warrant such a strong showing.

The latest oil price spike, meanwhile, presents a double-edged sword for GBP. While Britain’s economy is quite heavily reliant on imported energy, the acute UK inflationary risks posed by the renewed Iran tensions means that a Bank of England rate hike in 2026 has become more likely in the past few days.

BoE governor Bailey spoke this week, warning over the recessionary risks posed by a potential AI crash. These comments were of no particular interest to currency traders, however, which remain largely focused on the fiscal implications of an Andy Burnham government.

Outside his plans for a “Number 10 of the North" and his pledge to stick to the fiscal rules, Burnham's policy intentions - devolution, housing, public ownership of utilities, procurement reform - have been more rhetorical gestures than fully fleshed out plans, so at this stage investors don’t have all that much to go on