Sterling Traders Eye BOE Rate Decision to Validate Recent Rally

By Renae Dyer

The Bank of England is widely expected to raise interest rates Thursday but markets will be looking to see whether it provides strong enough signals about future tightening to allow sterling to extend its recent rally.

Money markets priced a 98% chance of a 25 basis-point rate increase Thursday followed by nearly three rises next year, LSEG data showed. With a move almost fully priced Thursday, the focus will be on the BOE's vote split and guidance about future decisions.

"We think today's hike can validate the pound's recent gains, for now," ING foreign exchange strategist Francesco Pesole said in a note.

However, the bar for the BOE to boost already lofty rate-rise expectations is high, he said.

Ahead of the decision, sterling fell 0.1% to $1.3464 against the dollar and dropped 0.1% versus the euro at 0.8340 per euro.

Sterling has recently strengthened markedly against the euro, having reached its highest level since March 2025 on Friday at 0.8317 per euro, according to LSEG.

This partly reflects a weaker euro due to concerns about French debt but sterling has also been supported by the prospect of the BOE raising rates.

"The recent strength of the pound is largely based on the assumption that the Bank of England is catching up with its tightening cycle, which will result in a wider interest rate differential with the euro area," Commerzbank foreign exchange analyst Michael Pfister said in a note.

Commerzbank remains skeptical about that but the Bank of England is likely to support sterling for now with "hawkish statements" signalling the potential for future tightening in Thursday's decision, he said.

However, some analysts view market expectations for further rate increases as overdone, leaving sterling vulnerable.

Rate-rise expectations look "far too aggressive" given soft underlying growth, a 4.7% unemployment rate and inflation well above the 2% target due to the energy price shock, Monex Europe analysts said in a note.

The sharp pullback in oil prices Wednesday "only strengthens the case for the monetary policy committee to hike cautiously and signal a December pause." The BOE could frame Thursday's potential rate rise as an insurance hike, rather than the start of a tightening cycle, leaving sterling exposed to a downward correction, they said.

Sterling could weaken if the BOE votes 6-3 in favor of raising rates, makes further hikes conditional on second-round inflationary effects, pushes back against market pricing, or if forecasts show medium-term inflation undershooting its target, Ebury's head of market strategy, Matthew Ryan said in a note.

An 8-1 or unanimous vote, on the other hand, with rhetoric that raises deeper concerns over the inflation trajectory would boost sterling, he said.

The BOE was due to announce its decision at 1200 GMT.

Write to Renae Dyer at renae.dyer@wsj.com

(END) Dow Jones Newswires

November 05, 2026 05:26 ET (10:26 GMT)