Pound Stays Strong as BoE Hike Pricing Remains Intact

The British Pound (GBP) has emerged as the strongest G10 currency after the US Dollar (USD) since the Middle East conflict began in late February, according to MUFG's Derek Halpenny. As attention shifts to the Bank of England's (BoE) July decision, Halpenny expects the BoE to stay on hold but sees inflation and energy risks keeping rate hike pricing intact.

This means that despite a September hike being priced at over 50% and a hike fully priced by November, the rates market remains more concerned about a shift in the Monetary Policy Committee (MPC) towards a hike. To see increased conviction on a September rate hike, we need to see increased signs of concern from the MPC.

Halpenny notes that the pound is well supported at current levels on the assumption that pricing for a September rate hike holds up given rising external inflation risks. The market will be focused on the vote, communication in the statement, minutes, and updated forecasts in the Monetary Policy Report to gauge the MPC's stance.