Sterling finds 'support' as Bailey's hawkish warning lifts pound ahead of MPC decision

The pound has found some modest support this week, holding comfortably above 1.35 against the dollar.

Gilt markets have stabilised following last week's sell-off, bringing a measure of calm back to proceedings - helped, it seems, by the reassuring tone of John Healey's first major speech as chancellor on Monday. Details of his fiscal plans remain thin ahead of next month's budget, but his emphasis on fiscal discipline and adherence to the fiscal rules has been enough to reassure investors for now.

Sterling also got a lift yesterday from hawkish comments by Bank of England governor Bailey. Appearing before the Treasury Committee, Bailey noted that inflation risks were "skewed to the upside" given the hostilities in the Middle East, and that this was already feeding through to financial markets.

We don't expect the MPC to raise rates next Thursday mind you, as committee members are likely to conclude that a hike isn't yet warranted given the fragile state of Britain's labour market, the recent surge in yields, and the absence of second-round inflation effects.

A hawkish shift in the voting pattern next week would, however, be telling in itself, and could give GBP fresh momentum in the second half of September.