Sterling Rally Hinges on BOE’s Rate Guidance

Money markets put the chance of a 25-basis-point increase on Thursday at 98%, and had priced in nearly three more rises next year, LSEG data showed. The BOE was due to announce its decision at 1200 GMT.

Sterling fell 0.1% to $1.3464 against the dollar ahead of the announcement and lost 0.1% against the euro, trading at 0.8340 per euro. It reached 0.8317 per euro on Friday, its strongest level since March 2025, according to LSEG. The euro has been weighed down in part by concerns about French debt, while expectations of higher UK rates have also supported the pound.

ING strategist Francesco Pesole said the expected increase could validate sterling’s recent gains, though he described the bar for the BOE to lift already high market expectations as high. Commerzbank analyst Michael Pfister said the pound’s strength largely reflects expectations that the BOE is catching up on rate increases, widening the interest-rate gap with the euro area. His bank remains skeptical, though he said hawkish signals from the BOE could support sterling in the near term.

Other analysts see a risk of disappointment. Monex Europe said expectations for rate rises looked “far too aggressive” given weak underlying growth, unemployment of 4.7% and inflation above the 2% target because of the energy-price shock. The recent sharp fall in oil prices, the firm said, strengthens the case for a cautious increase and a signal that rates could be held in December. If the BOE presents a rise as insurance rather than the start of a tightening cycle, sterling could face a downward correction.

Ebury’s Matthew Ryan said sterling could weaken if the vote is 6-3, future rises are tied to second-round inflation effects, the BOE pushes back against market pricing or its forecasts show medium-term inflation below target. An 8-1 or unanimous vote, accompanied by greater concern about the inflation outlook, would support the pound, he said.