Pound benefits from a hawkish BoE
- Markets are anticipating aggressive rate hikes by the Bank of England.
- The stable political situation is playing into the hands of the bulls on GBPUSD.
The US dollar has been falling since last Thursday, marking its longest losing streak since June 2025. The decline in Treasury yields to five-week lows is adding to the pressure, and the British pound has emerged as the main beneficiary of the dollar’s weakness. Investors are gradually shaking off their fears about the country’s new budget, while positive macroeconomic data is increasing the likelihood of aggressive monetary tightening by the BoE.
Bloomberg reports that Chancellor John Healey will not raise capital gains tax. Instead, the increase in budgetary expenditure will be covered by a rise in levies on banking income. There is a view in the market that, in a complex and rapidly changing environment, the new Chancellor would be better off not drawing attention to Britain, leaving investors to worry about the US, France, Japan or the Middle East. To stay out of the spotlight, Britain needs a modest and transparent budget.
The fact that there will be no excessive growth in expenditure is also supported by a fairly modest appetite for borrowing in September: the government borrowed £24.5 billion, 7.7% more than a year earlier, but only slightly above the £23.8 billion expected by economists polled by Reuters.
A stable political climate, coupled with labour market and inflation data, has increased the likelihood of aggressive monetary tightening by the Bank of England and pushed GBPUSD to five-week highs. Unemployment unexpectedly fell from 4.9% to 4.7% in June–August, while average wage growth accelerated from 3.6% to 3.7%, exceeding the consensus forecast. MPC member Megan Greene stated that the labour market is stronger than the central bank realises. With consumer price inflation rising to 3.5%, an 11-month high, a November base rate hike is all but a foregone conclusion.
Investors expect the Bank of England to go much further. High energy prices are gradually feeding through into core inflation. In September, core inflation accelerated from 2.6% to 2.8%. Services inflation rose from 3.4% to 3.7%. Over the next 12 months, the futures market has priced in a rise in the base rate to 4.85%, an increase of 110 basis points. More than four rate hikes represent a faster pace than the Fed’s, laying the groundwork for a GBPUSD rally. The main thing is that the Treasury’s draft budget does not disappoint the bulls.
Summary: The pound is rising as the dollar slips: political stability, a strong labour market, and faster inflation raise the odds of a BoE hike in November, with markets pricing in 110 bp over the next year.
Author
Alexander Kuptsikevich, a senior market analyst at FxPro, has been with the company since its foundation. From time to time, he gives commentaries on radio and television. He publishes in major economic and socio-political media.
