British Pound: GBP gains on rate hike bets, though further upside appears limited - BBH

The UK’s August labour market figures have strengthened expectations of a 25 bps Bank of England (BoE) rate rise to 4.00% on 5 November, with GBP gaining against major currencies, BBH’s Elias Haddad notes. Employment and unemployment readings were better than the BoE had projected, although pay growth points to persistent services inflation. Haddad nevertheless believes the BoE may not have to tighten policy as much as markets anticipate, creating a headwind for the Pound.

Pound Gains as BoE Rate Rise Expectations Strengthen

"GBP is up against most major currencies. UK August labor market data reinforced the case for a BoE 25bps policy rate hike to 4.00% on November 5."

"In the three months to August, the employment rate increased +0.2ppt to 75.3% while the unemployment rate decreased -0.2ppt to 4.7%, suggesting more people are finding work. The unemployment rate is the lowest since July 2025 and tracking below the BoE’s Q3 projection of 5.0%."

"The policy-relevant private sector regular pay growth matched consensus and the BoE’s Q3 projection at 3.0% y/y vs. 2.9% in July. But wage growth also suggests services inflation will remain sticky well above the bank’s 2% target."

"The swaps curve implies 95% odds of a November BoE rate hike and 100bps of tightening in the next twelve months. In our view, the BoE may not need to tighten as much as markets anticipate, which is a headwind for GBP."

"The UK economy is operating below capacity, the policy rate is near the top of the BoE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive following the October 28 UK budget."

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