UK outlook 'definitely stagflationary' as GBP expected to see volatility this week
The pound provided the most interesting trading action in the G10 last week, as the Bank of England made clear to markets that it is more concerned with sticky inflation than the market had believed.
Though the August meeting did result in a cut in rates, it took two votes to reach that outcome (the first time that has happened since the MPC was formed in 1997), and four of the nine members voted against any reduction in the base rate.
All the while, the bank’s “gradual and careful” rate guidance was maintained, and the MPC also upped its forecasts for both inflation and growth in 2025.
The pound soared on the news as traders pushed back their expectations for the next cut into 2026. We expect further volatility in sterling this week, as critical data (labour market reports for June and July and second quarter GDP) will provide a fresh look at the extent of the UK economic slowdown.
The outlook is definitely stagflationary for now, however.
Author
Matthew Ryan, CFA
Ebury
Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.
