- Pound to Dollar Forecast: MUFG’s Two-Hike View Faces Inflation Test
- Pound Sterling nears $1.34 against the US Dollar as UK inflation rises, testing whether the Bank of England needs to go beyond MUFG’s two-hike view.
- UK Inflation Rises Beyond Fuel Prices
- Fewer Vacancies Complicate the Case for Repeated Hikes
- Markets Had Already Moved Beyond Two Increases
- What This Means for GBP/USD
Pound to Dollar Forecast: MUFG’s Two-Hike View Faces Inflation Test
Pound Sterling nears $1.34 against the US Dollar as UK inflation rises, testing whether the Bank of England needs to go beyond MUFG’s two-hike view.
The Pound to Dollar exchange rate edged higher on Wednesday following a rise in UK inflation, trading at $1.3390 on Wednesday, up 0.13% after Tuesday’s 0.48% gain.
September’s annual inflation rate increased to 3.5% from 3.1%, keeping pressure on the Bank of England to act at its November meeting.
The harder question for Sterling is whether the figures justify the longer series of increases already anticipated before the release.
MUFG expects a November hike and another early in 2027, while Lloyds has questioned whether stronger employment provides sufficient grounds for a more aggressive path.
Both views preceded today’s release.
UK Inflation Rises Beyond Fuel Prices
The Office for National Statistics release showed core inflation, excluding energy, food, alcohol and tobacco, rising to 2.8% from 2.6%, while services inflation increased to 3.7% from 3.4%.
Motor fuels made the largest upward contribution to the headline acceleration, but the broader increases give policymakers more to consider than petrol prices alone.
Goldman Sachs had anticipated that pattern: its pre-release estimates for headline, core and services inflation all matched the published annual rates when rounded to one decimal place.
At its September meeting, the BoE held Bank Rate at 3.75%, with three members voting for an increase.
Lloyds senior UK economist Nikesh Sawjani wrote before CPI:
“The outlook for Bank Rate continues to hinge primarily on developments in the Middle East, their implications for energy prices and whether higher costs generate second-round effects in domestic wages and prices.”
“The Bank has similarly emphasised that the policy response will depend on the scale and duration of the energy shock and how it feeds through to the economy.”
Fewer Vacancies Complicate the Case for Repeated Hikes
Tuesday’s employment report weakened the argument for waiting, with unemployment falling to 4.7% and payroll revisions reversing August’s previously reported decline.
Yet vacancies fell to 691,000 in the three months to September, leaving employers with little sign of a widespread recruitment revival.
Private-sector regular pay growth was 3.0%, only marginally higher than previously.
Sawjani wrote: “Even so, there remains limited evidence of a renewed build-up in wage pressures. Private sector pay growth remains well below the rates seen in recent years, while falling vacancies and still-subdued hiring demand should continue to limit upward pressure on wages.”
The distinction between firmer employment and an overheating economy was central to yesterday’s debate over how much tightening the jobs figures warranted.
Sawjani concluded: “As such, the release reinforces expectations of a November hike, rather than making a compelling case in itself for a more aggressive path thereafter.”
Markets Had Already Moved Beyond Two Increases
MUFG regards the improvement as meaningful, while acknowledging the limits of a single release: “While the monthly data can be volatile and prone to revisions, the pick-up is consistent with recent surveys pointing towards stabilization in labour market conditions.”
Senior currency analyst Lee Hardman wrote before CPI: “We continue to expect the BoE to hike rates next month and deliver a second hike early next year.”
“A view that is already well priced into the UK rate market which is anticipating even more tightening and has almost three hikes priced in by March of next year.”
Before CPI, Mizuho’s Tuesday assessment extended that horizon: “Four hikes are now priced by July 2027, leaving Tuesday’s labour-market data more relevant for the pace and extent of tightening than for the near-term call, with a November hike already 97% priced.”
Higher expected UK rates can support Sterling through improved returns on Pound assets, but a forecast of two increases offers less additional encouragement when investors have already allowed for more.
The US outlook also offers the Dollar some rate support. Mizuho wrote on Tuesday: “Fed expectations were little changed, with the market still leaning towards a hold next week and just over 25bp of tightening priced by December.”
What This Means for GBP/USD
Pound Sterling is approaching $1.34 with stronger jobs figures and higher inflation supporting the November hike case. Further gains would be easier to sustain if the BoE endorses the more extensive tightening already anticipated by markets, reducing the risk that those expectations unwind.
If officials instead emphasise subdued hiring and limited wage pressure, expectations for later increases could retreat even with a November hike delivered. That would reduce one source of the Pound’s recent support against the US Dollar.
The 5 November decision also follows the UK Budget. MUFG’s constructive Pound Sterling view depends on fiscal plans retaining investors’ confidence, leaving both the rate guidance and the credibility of the Budget important to whether this recovery lasts.
