Sterling continues to rally and cut looks certain next week

Sterling continues to rally on relief about the recent UK budget, and mildly positive revisions to the PMIs last week, which suggested that Britain’s economy was not slowing to the extent that market participants had feared. This no doubt helped GBP end the week ahead of all of its European peers as well as the dollar. Market expectations for Bank of England rates (at most two further cuts with a terminal rate in the mid-3s) appear roughly correct to us.

With the UK economy showing signs of slowing, the jobs market remaining fragile and inflation finally dropping from its highs, we think that another cut is almost a certainty next week. But, the key will be the voting split among the committee and bank’s communications on future easing. The combination of relatively high rates, modest economic growth and a dovish Federal Reserve should keep the wind at the back of the pound in the coming months.