Sterling climbs as rate hike expectations support UK currency

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Sterling climbs as rate hike hopes grow

Highlights

Sterling rises to $1.345, up 0.1% on Friday, as Bank of England chief economist Huw Pill signals further rate hikes amid above-target inflation.
IMF upgrades UK 2026 growth forecast to 1%, but support from lower oil prices is challenged as Brent crude rises 5% this week to $76 per barrel.
Andy Burnham secures support from most Labour MPs to replace Keir Starmer, providing the pound some stability amid expectations for fiscal discipline and potential policy shifts.

Rate outlook and market drivers

As reported by Reuters, the pound rises to $1.345 on Friday, its highest level in nearly one month, and is last up 0.1%. Against the euro, the single currency falls to 85.18 pence, its weakest level versus sterling since late June 2025, before trimming losses to trade flat.

Analysts say sterling's recent strength reflects a mix of stronger-than-expected UK growth, foreign acquisitions of UK companies, easing political instability and expectations for Bank of England policy. Monex Europe senior FX strategist Barry van der Laan says comments late on Thursday from Bank of England chief economist Huw Pill, indicating that interest rates will have to rise, are likely supporting the pound.

Van der Laan says the remarks reinforce the market view that the Bank of England has less scope than the Federal Reserve or the European Central Bank to look through inflation. He adds that, with no important UK data due on Friday, sterling is likely to be driven by broader dollar moves, oil prices and headlines from the Middle East.

Energy prices and political backdrop

The International Monetary Fund upgrades its UK growth forecast this week and predicts the economy will expand 1% in 2026. Britain, as a major energy importer, has benefited from the June U.S.-Iran deal and the following decline in oil prices, which had improved the near-term outlook.

That support is now being tested as oil prices rise about 5% this week after the U.S. and Iran trade strikes and Washington cancels an Iranian oil trading waiver. Brent crude is last roughly flat at $76 a barrel, although it remains well below its April high of $126.

Domestic politics also remain in focus for currency markets. Former Greater Manchester mayor Andy Burnham takes a major step toward becoming the next prime minister after securing backing from the vast majority of Labour members of parliament to replace Keir Starmer, and some analysts say the clearer leadership outlook and Burnham's commitment to fiscal rules give the pound modest support, though they caution that UK markets could turn more volatile once he begins setting out economic policies.

Bank of England Chief Economist Huw Pill’s signal that UK interest rates may need to rise further was the focus of our earlier coverage, as policymakers weighed persistent inflation pressures. We noted that his comments, ahead of the July 30 policy meeting, reinforced market expectations that the BoE is still leaning toward additional tightening rather than an early pause.

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