Sterling holds steady as BoE rate decision and U.S. midterms keep FX trading cautious

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Sterling steady as BoE, US midterms approach

Highlights

The pound trades flat at $1.3414 versus the dollar and 83.35 pence per euro as traders await the Bank of England meeting and U.S. midterms.
The Bank of England is expected to raise rates for the first time since August 2023, prompted by UK inflation at 3.5% and a stabilizing labour market.
Markets price in three more BoE rate hikes next year, but some analysts expect fewer increases, with BMO remaining cautious on sterling and preferring pound over euro.

BoE meeting and election risk shape trading

As reported by Reuters, the pound is flat against the dollar at $1.3414 and stands at 83.35 pence per euro, marginally firmer on the day and close to an 18-month high reached last week.

The cautious tone reflects broader market unease before the U.S. midterms. Investors are also monitoring pressure in global markets from a slump in AI-related shares and tensions in the Gulf, where a senior Iranian official tells Reuters that Iran and the U.S. remain far from a deal to end the war.

The main domestic event for UK markets is the Bank of England meeting on Thursday. The central bank's Monetary Policy Committee is expected to raise interest rates for the first time since August 2023, while the U.S. Federal Reserve and the European Central Bank have already been tightening policy to keep high energy costs from feeding through into wider inflation.

Rate path debate drives outlook for sterling

Henry Cook, Europe economist at MUFG, says the balance of risks has shifted enough that the MPC can no longer remain on hold. He says UK inflation, already at 3.5%, is heading materially higher, the economy has outperformed expectations, and the labour market appears to have stabilised.

Markets are pricing in three further BoE rate increases next year in addition to a move this week, although many analysts see that view as too aggressive. Cook expects only one more increase in February.

Mark McCormick, chief FX strategist at BMO, is even more sceptical, saying the expected move looks more like a one-off increase than the start of a new tightening cycle. In his view, the BoE is more likely to push back against current market pricing than endorse it, leaving BMO cautious on sterling against the dollar while still favouring sales of the euro against the pound because of French political risk and weaker euro area growth.

Our earlier article on expectations for a Bank of England rate hike explained how persistent inflation and stronger UK data pushed most economists toward forecasting a 25-basis-point increase in November. It also noted that, while energy-driven price pressures had not fully fed through yet, policymakers were signaling greater readiness to tighten if inflation risks stayed elevated, leaving the outlook for further moves uncertain.

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