Pound Holds Steady as Traders Brace for BoE's First Hike Since 2023

The Bank of England is about to move — and the pound is holding its breath. Sterling stayed roughly flat against the dollar and euro on Monday as traders pivoted from last week's UK budget to Thursday's expected rate hike, according to Reuters. If it lands, it will be the central bank's first increase since August 2023.

Britain has been the odd one out. The European Central Bank and the Federal Reserve have both already raised rates this year to fight the energy price surge sparked by the Iran war. The BoE instead sat on what ING economists and strategists call an 'active hold' — a stance they note was de facto tightening, since the bank had been expected to cut by more than 50 basis points this year and simply didn't.

That patience is running out. ING said the worsening energy crisis has made it 'much harder for the Bank not to act,' and policymakers have kept repeating that the odds of a hike climb the longer energy prices stay high. Inflation, now at 3.5%, is seen pushing past 4% early next year.

Oil is the wild card. Crude hit multi-month highs last week and, even after sliding roughly 4.5% Monday on renewed hopes for a diplomatic end to the Middle East conflict, it sat at $108.37 a barrel — painfully above pre-war levels. The softer oil price nudged risk appetite up, pressuring the dollar and leaving sterling a touch higher at $1.3417 and at 83.53 pence per euro.

Markets are betting bigger than ING thinks is wise. Money markets were fully pricing four quarter-point hikes by next September, per LSEG data, with ING calling that pricing 'extreme' while still expecting a follow-up hike in February.

Thursday's decision caps a busy stretch for UK markets. Finance minister John Healey's first budget, delivered last week, brought no surprises — and neither the pound nor gilts flinched. Now all eyes shift to Threadneedle Street.