BoE Expectations Lean Hawkish, Sterling Upside Meets Resistance

[BoE Expectations Lean Hawkish, Sterling Upside Meets Resistance]

(1) Institutional views indicate that remarks from Bank of England officials this week reinforced the assessment that the market-implied policy path is overly hawkish.

(2) The market has fully priced in a November rate hike, with roughly a 50% probability of another hike in December, and the rate curve implies four hikes over the next 12 months.

(3) If even the BoE's most hawkish officials are questioning the pace of tightening, it suggests market expectations have run ahead of policymakers.

(4) The risk is that the BoE struggles to be more hawkish than the market, and a single rate hike alone is unlikely to serve as a clear positive for sterling, with the asymmetric risk in the rate curve skewed toward dovish repricing.

(5) Sterling's muted reaction to officials slightly pushing back against market pricing hints that, aside from volatility around policy decisions, this may not become a key driver for the pound's overall trend, with next week's inflation data set to offer clearer guidance.

(6) Sterling remains a higher-yielding currency among the G10, and as long as UK economic growth holds steady, carry demand should keep pullbacks relatively shallow, particularly against the euro.