Sterling Surges as Markets Reassess BOE Interest Rate Outlook
The GBP/USD currency pair reached its highest level in two weeks on Thursday, reaching 1.3552. Despite rising oil prices and escalating Middle East tensions, sterling strengthened. The main driver behind this trend is a reassessment of the Bank of England's monetary policy outlook.
Investors do not expect the central bank to raise interest rates at its next meeting but are pricing in at least two rate hikes by March next year, with a 40% probability of a third increase. This compares to just two expected hikes from the Federal Reserve over the same period.
The UK inflation backdrop is also supporting expectations of tighter monetary policy. Consumer price inflation accelerated to 2.9% in July, up from 2.6% the previous month. However, Bank of England Governor Andrew Bailey has stressed that further tightening is not guaranteed.
Against this backdrop, sterling may retain some support but the scope for further gains remains limited for now. From a technical perspective, the market has nearly reached its local target at 1.3566 and is forming a narrow consolidation range below this level.