Bank of England Governor Andrew Bailey has effectively reduced market expectations for further monetary tightening, according to ING’s Chris Turner. At one stage, markets were pricing in over 80 basis points of Bank of England rate hikes for the year, but this has now dropped to just 33 basis points following Bailey’s recent comments and a decline in oil prices [1]. In a speech delivered on Friday, Governor Bailey indicated that the BoE could overlook temporary above-target inflation, provided that second-round effects do not materialize [1].
Despite the significant reduction in anticipated rate hikes, the British Pound has remained relatively resilient. However, Turner notes that the prevailing strength of the US Dollar is likely to cap GBP/USD gains near the 1.3500 level [1]. Additionally, support for EUR/GBP is expected to remain firm around the 0.8610/20 area [1].
The removal of expectations for an aggressive BoE tightening cycle has not resulted in substantial downward pressure on sterling, but the stronger dollar narrative continues to be a limiting factor for further appreciation [1].
CONCLUSION
The Bank of England’s more cautious stance on rate hikes and the ongoing strength of the US Dollar are expected to restrict gains in GBP/USD. While sterling has shown resilience, market participants should anticipate limited upside as long as these dynamics persist.