A delayed landing for GBP rates
At a Glance
The desk anticipates a decline in GBP rates that contradicts current market pricing, which suggests further hikes from the Bank of England. Per the full note from ING, rates have drifted too high compared to the BoE's expectations, largely due to a risk premium resulting from past monetary policy misjudgments. Looking ahead, structural global factors are expected to introduce volatility in UK rates, with the 10-year gilt yield likely easing as inflation fears diminish. This sentiment aligns with our internal coverage forecasting a median GBPUSD target of 1.3500 for December 2026, reflecting the consensus among several firms including **HSBC** at 1.3500 and **Rabobank** at 1.3300.
Key Takeaways
- 01The desk anticipates lower GBP rates as inflation risks abate, contrary to market pricing.
- 02Current expectations of rate hikes from the BoE are viewed as excessively hawkish.
- 03The median GBP/USD target across firms is 1.3500 for Dec 2026, reflecting mixed sentiment in the market.
- 04Structural global factors are predicted to add volatility to the UK rates outlook.
Full Analysis
What the desk is arguing
The desk believes GBP rates are overly priced relative to the Bank of England's projections, with a downward adjustment expected as inflation concerns relax. The anticipation of a peak in the BoE's rate cycle, influenced by global financial conditions, highlights the disconnect between market expectations and central bank policy. As outlined by ING, current forward pricing anticipates a terminal rate of around 4.75%, which is considered excessive by market standards given the BoE's track record of cautious policy adjustments.
Supporting this view, ING noted that excessive hawkishness seems to be a lingering reaction to previous periods of policy neutrality. This analysis suggests that the market may be mispricing rate hike expectations, as the BoE is poised to contemplate rate cuts in the face of easing inflation pressures. Thus, a reversion to lower rates could be imminent particularly if global conditions stabilize further.
Where it sits in our coverage
Our consensus target for GBP/USD currently sits at 1.3500, with a range visible among firms such as: - Rabobank: 1.3300 (Dec26) - HSBC: 1.3500 (Dec26) - Commerzbank: 1.4020 (Dec26)
This sits in the middle of the spread, with some projections like Nomura forecasting a lower target of 1.2900 by December 2026. The desk's position on the directional shift in GBP rates diverges from consensus which holds mixed views on the timing and scale of future rate cuts. While the median reflects cautious optimism, expectations do vary significantly between firms, signifying a complex outlook on GBP's directional bias.
How other firms see it
Firms such as Rabobank and HSBC share a similar stance anticipating stabilization in GBP rates, seeing potential declines; however, others like Nomura remain fundamentally bearish with a forecast suggesting broader adjustments in currency dynamics. Contrarily, firms like BofA maintain a more pessimistic outlook towards GBP strength.
Notably, the trajectory of GBP rates could also influence associated pairs, especially EUR/GBP, as shifts in BoE policy may impact the broader UK economic landscape and its currency pair correlations. Additionally, closely monitoring the US Federal Reserve's trajectory may yield insights into the potential pressures on GBP as well.
Market Implications
As rates adjust, traders should focus on the 10-year gilt yield and its influence on GBP pricing, particularly observing levels around 1.3500. Additionally, any signals from the US Fed regarding rate cuts could create further ripples in GBP/USD performance. With no upcoming high-impact UK events, shifts in broader market sentiment will be key.
GBP/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bearish | 1.3300 |
ING | Neutral | 1.3500 |
MUFG | Bullish | 1.4000 |
From the original
Articles A delayed landing for GBP rates Published 10:26 Rates United Kingdom Translate Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download GBP rates seem to have drifted too high versus Bank of England expectations, which we attribute to a significant ri
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