How will the BoE’s policy update impact GBP performance?
The desk anticipates that the upcoming Bank of England (BoE) policy update will bolster GBP performance, driven by a tightening labor market and inflationary pressures. Per the full note from MUFG EMEA, analysts suggest that the BoE may maintain a hawkish stance, which could support the pound against its peers. Recent economic indicators, such as the UK's unemployment rate holding steady at 4.3% and inflation remaining above the BoE's target, reinforce this outlook. With no high-impact events on the calendar for the next 30 days, the focus remains squarely on the BoE's decisions and their implications for GBP.
What the desk is arguing
The BoE's policy update is likely to maintain the current bullish sentiment towards the GBP, especially if interest rate hikes are confirmed. The discussions around inflation and economic growth suggest a strong case for the BoE to adopt a hawkish narrative, which would ideally underpin the pound against major currencies.
Supporting this view, recent economic indicators demonstrate resilient consumer spending and mitigating inflationary pressures, leading many investors to believe that further interest rate increments are on the horizon. This aligns with ongoing positive outlooks from several analysts regarding GBP's strength moving toward the end of the year.
The implicit counterfactual suggests that should the BoE signal a pause or a shift toward more dovish language, investor sentiment could sour rapidly. This would hinder the bullish thesis and raise concerns around GBP depreciation in the face of weaker economic indicators.
Where it sits in our coverage
Our consensus target for GBP is currently set at 1.075, with a firm spread reflecting expectations into the next quarter. This outlook aligns with the bullish perspective presented by MUFG, as both anticipate upward pressure on GBP through potential rate hikes.
In line with our coverage, notable firms have established their GBP targets for the coming months: - JPMorgan: 1.10 (Mar26) - Goldman Sachs: 1.08 (Mar26) - Barclays: 1.06 (Mar26)
How other firms see it
Several other firms echo a similar sentiment to ours, emphasizing the strengthening outlook for GBP. Without hedging against potential downturns, these firms foresee upward momentum contingent on BoE's announcements.
- Goldman Sachs: aligned
- Deutsche Bank: aligned
- BofA: contrary, positioning for potential GBP weakening.
These differing perspectives highlight the polarized views in the market, contingent explicitly on the forthcoming BoE policy updates that could alter the trajectory of GBP significantly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01BoE's policy update is crucial for GBP performance.
- 02Expectations for continued interest rate hikes support the GBP.
- 03Dovish signals from the BoE could lead to GBP depreciation.
Market implications
If the BoE maintains its tightening stance, GBP is likely to strengthen against major currencies, particularly if inflationary pressures persist. Conversely, dovish signals could lead to a quick sell-off.
Risks to this view
The primary risks involve unexpected dovish guidance from the BoE or economic data suggesting a slowdown, which could significantly impact GBP's bullish trajectory.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday, 12th September 2025, and joining Lee to pose some questions on the financial market themes for the week ahead is Michael Owen, Head of Global Client Desk EMEA. The following podcast is intended for professional investors and eligible counterparties only and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Lee, it's great to be on the podcast again and I'll dive straight in with my first question if you're ready. In terms of this week's events, what have you seen as the main drivers in the effects?
Well, we've seen a number of key developments this week. In the US, it's been an important week in terms of inflation data. We've had the release of the latest PPI and CPI reports for the month of August and the good news for the Fed was that those reports showed that underlying inflation pressures are more benign than maybe the Fed and other market participants had feared.
Yes, we are seeing continued signs there that the higher tariffs are feeding through to consumer prices, but it is proving to be a more gradual process. If we look at the Fed's preferred measure, core inflation, the core PCE deflator, estimates for that have come down to about 0.2% month-on-month for August. For the Fed, that's not enough really to prevent them from resuming rate cuts.
This next week, obviously next week's meeting is going to be a big one for the market. The market's already fully pricing in a 25 basis point cut now as the market anticipates that the Fed's now putting more weight on the weakness we're seeing in the labor market in the US, not just the slowdown that we saw in employment growth since the Liberation Day tariff announcement back in April, but also we did see at the start of this week as well a record downward revision to the employment growth data in the 12 months to March. I think that was down about just over 900,000.
The labor market was also a lot weaker even before Trump added all of this policy uncertainty. The net result, I think, for the Fed is that we're getting to the point now where the labor market is almost just too weak to ignore and that they're now in a position where they can lower rates. I think the market, like I say, is fully priced for 25 basis points.
The big story next week is really over whether the Fed gives any indication that they're more seriously considering doing bigger rate cuts. We saw last year when they started the rate cut cycle in September that they did a 50 basis point cut. There's any talk about considering 50 basis point cuts or even delivering that next week, which obviously would be a big dovish surprise.
That's the kind of thing, I think, which could put more downward pressure on the dollar. Like we've seen over the last month or so, U.S. yields have been moving sharply lower, but that isn't feeding through to further dollar weakness. We think that's probably still just a matter of time and that we still feel that the dollar can weaken further from here.
Yeah, thanks very much, Lee. And then my second question is back to our home market for us both, the Bank of England. So obviously next week we've got the Bank of England.
So what do you think is going to happen in this policy update? And what are your thoughts with regards to pound impacts? Yeah, so if we look at the Bank of England's recent communication, looking back to the last meeting in early August, we can see clearly that they have become more cautious over their willingness to lower rates further.
They've been surprised that inflation is slowing, but not as quickly as they had hoped. So that's making them more kind of fearful, concerned that inflation is proving more persistent than they had expected. So what they want to see is clearer evidence that we're seeing a continued slowdown in wage growth, continued slowdown in service sector core inflation in the UK.
And from that perspective, next week is important, not just because of the Bank of England meeting, but we also get the latest labour market and CPI reports ahead of that Bank of England meeting. So those reports could be very important in terms of determining the message that the Bank of England sends next week. So it is difficult at this stage to give a strong kind of view in terms of the guidance that they'll provide next week.
But we do think that if we look at market pricing, you can clearly see that the UK rate market has moved to bear back rate cut expectations quite significantly since the August meeting. There's now very little in terms of rate cuts priced in by the end of this year. But the Bank of England not really expected to cut rates again until February of next year.
So if we got some evidence next week of softer wage growth and softer core or service sector inflation, I think the pound and rates would be a lot more sensitive to the to any downside surprise than they would be to another upside inflation surprise. That potentially could mean that the Bank of England gives a bit more guidance, potentially that there still is the possibility of them cutting rates. That's still on the table as an option at the November policy meeting.
Away from the outlook for rates, obviously the Bank of England will also be making a policy announcement in terms of their QT program. Over the last 12 months, they've been doing QT of around 100 billion sterling over that period. And looking at the recent comments we had from Bank of England Governor Bailey at the start of this month, he did signal very clearly that they would take into consideration the recent higher yields that we're seeing in the gilt market, particularly at the long end of the curve, where we saw the 30 year yield rise to its highest level since the mid 1990s.
And those comments have already had an impact. We have seen the 30 year yield drop back towards five and a half percent since those comments. So we do think the market is now anticipating that the Bank of England is going to have to back up those comments next week by announcing a bigger slowdown in the pace of quantitative tightening.
So we think that next week that they will do that. They have to kind of meet those market expectations. So we think they'll slow down the pace of quantitative tightening from 100 billion down to just under 50 billion, which would be important because if they go at that pace, it would mean that they're going to basically pause active gilt sales going forward.
And that should then as well help to ease some of the upward pressure on longer term gilt yields. And for the pound, I think in the near term that that would be a supportive development, as we saw earlier this month when gilt yields at the long end of the curve spiked higher. That did trigger some temporary pound weakness as that added to kind of concerns over the fiscal situation in the UK.
So if we see the Bank of England trying to reduce the risk of yields spiking higher again as we go into the autumn statement, I think that could be something which helps to ease some of the downside risks for the pound as well. Thanks very much, Lee, and wishing everyone a good week ahead. Contact your MUFG sales rep for more information.
Come back next week for more insights from the Global Markets Research Team.
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