Pound Holds Steady; BoE Losing Grounds for Rate Hike

The pound sterling edged up against the US dollar during Friday's Asian trading session, recovering from losses over the previous two days. The GBP/USD pair hovered around the 1.3600 level, even as market expectations for a Bank of England (BoE) interest rate hike began to wane following a continued decline in Brent crude oil prices.

Falling oil prices have helped alleviate concerns regarding inflationary pressures in the UK. This shift has caused money markets to push back their forecasts for the next BoE rate hike from late 2026 to early 2027, thereby removing a key factor that had previously supported the pound's strength.

Based on market pricing, investors are now factoring in only about 24 basis points of tightening through December 2026 and approximately 36 basis points through February 2027. For the September meeting, the market is pricing in less than 4 basis points of tightening, implying a roughly 15% probability of a rate hike.

Most economists also anticipate that the BoE will maintain interest rates at 3.75% for the remainder of the year. Although UK inflation rose to 2.9% in July, the increase was largely driven by household energy costs, while labor market conditions showed signs of softening.

The drop in oil prices is a significant factor; previously, a surge in energy costs—spurred by US-Iran tensions—had raised fears that the BoE might be forced to tighten policy again. Now, the easing of the energy risk premium has reduced that pressure, giving the central bank room to keep interest rates unchanged.