British Pound: Resilient growth supports more BoE hikes - Commerzbank

Volkmar Baur at Commerzbank highlights the UK economy’s resilient growth, with upward revisions to GDP and solid monthly data. With inflation still sticky and core inflation at 2.6%, he now expects the Bank of England to hike rates in November and again in February to 4.25%. As a result, EUR/GBP is seen trading broadly sideways in coming months before Sterling weakens later in 2027.

BoE hikes and Sterling path

"The UK economy has remained relatively resilient so far this year. Following growth of 0.6% q/q in the first quarter, second-quarter GDP was revised up to 0.5% in the final release. Monthly GDP data for July, showing a 0.4% m/m increase, also point to a solid start to the third quarter."

"The improved growth outlook should make it easier for the Bank of England to raise rates further in order to lean against inflation. Until now, we had not expected the BoE to hike rates again. Recent developments, however, have led us to conclude that a November rate hike is now more likely than not. Moreover, we do not expect it to be a one-off move. We therefore anticipate another hike in February, taking Bank Rate to 4.25%."

"The market is also pricing in two additional rate hikes by February, meaning our revised call should have little immediate market impact. However, we had previously expected sterling to weaken towards year-end. We now expect EUR/GBP to trade broadly sideways over the coming months."

"It is only from the second quarter of next year that we expect sterling to come under renewed pressure against the euro. The market currently prices in two further rate hikes beyond the two moves we expect, implying four hikes in total. Following the February meeting, we expect those additional tightening expectations to be gradually priced out, putting sterling under renewed pressure."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)