Markets are weighing BoE rate cut prospects against sticky inflation and muted growth, leaving GBP outlook nuanced despite yesterday’s calm in gilt markets, Rabobank's FX analyst Jane Foley reports.

UK budget offers limited relief

"In recent weeks, expectations for a BoE December rate cut have risen. This was prompted initially by softer than expected UK September CPI inflation data and encouraged by the October CPI inflation report. UK inflation rates for headline, core, services and food remain well above the BoE’s 2% target. However, the market has been encouraged by the downward trend. Ahead of yesterday’s budget, there had been a lot of hope that Reeves would announce a host of measures that could counter inflation."

"Indeed, there have been freezes to prescription charges and some rail fares in addition to an effort to soften household energy bills. That said, the increase in minimum wages will likely be reflected in higher prices and the OBR has revised up its inflation forecast for 2026 relative to its March outlook. This now stands at 2.5%, up from a March forecast of 2.1%. If the BoE cannot justify a rate cut next month, this will very likely be reflected by poorer UK business confidence."

"While lower rates is not generally a positive currency theme, given the issues around broader business, investment and gilt market sentiment the outlook for GBP is currently more nuanced. The pound yesterday took comfort from the fact that the gilt market had remained calm. However, fears about slow growth, weak productivity and sticky inflation are not reflective of an attractive investment backdrop. We maintain the view that EUR/GBP will creep higher into 2026. We can not rule out another dip by GBP/USD to 1.30 in the weeks ahead, but this would assume a stronger USD."