The Bank of England is in no hurry to take risks

GBP/JPY

Key zone: 214.00 - 215.50

Buy: 216.00 (on a strong positive foundation); target 218.50-219.00; StopLoss 215.40

Sell: 213.50 (following a decisive break above the 214 level) ; target 211.50-210.00; StopLoss 214.20

The British market continues to nervously assess the outlook for monetary policy. Against the backdrop of a worsening inflation picture and growing risks of a new energy shock, the probability of a Bank of England rate hike has once again moved into the focus of investors. The June 18 meeting may become an event for the pound with pronounced asymmetric risk.

At the same time, the domestic economic situation does not favor harsh actions by the regulator. Keir Starmer’s government and Chancellor Rachel Reeves are betting on stability, investment, and budget discipline. However, the growing tax burden on businesses and the increase in labor costs are intensifying pressure on employment in retail, the HoReCa sector, and small business. Under such conditions, additional monetary tightening risks amplifying the negative effect of already existing fiscal restrictions.

Reminder

For the currency market, what matters is not so much the rate itself as the divergence between the regulator’s actual decision and market participants’ expectations. At the moment, the base-case scenario remains keeping the Bank Rate at 3.75%, accompanied by hawkish rhetoric in the statement. The pound’s reaction will be determined by the scale of deviation from this scenario.

At the same time, risks are gradually shifting toward tighter policy. The inflation backdrop is deteriorating, and individual members of the Monetary Policy Committee (MPC) are already allowing for the need for additional tightening.

What factors will determine the Bank of England’s decision?

Inflation remains the main argument in favor of a rate hike.

In April, the Consumer Price Index (CPI) declined to 2.8% after 3.3% a month earlier, but the structure of inflation still raises concern:

• CPIH — 3.0%;
• Core CPIH — 2.8%;
• transport — 4.5%;
• communications — 4.5%;
• restaurants and hotels — 4.4%.

Services inflation slowed to 3.4%, but remains significantly above the level compatible with the Bank of England’s 2% target. Additional pressure comes from the energy shock, which is already reflected in fuel costs and could intensify secondary inflation effects through wages and prices.

The labor market is sending mixed signals

The unemployment rate remains in the 4.9–5.0% range, but the number of vacancies continues to decline: 705,000 in February–April versus 759,000 a year earlier.

Nominal wage growth slowed to approximately 3.6%, while real household incomes have practically stopped growing. This argues against aggressive rate hikes, as domestic demand is gradually cooling and signs of labor-market overheating are becoming less obvious.

Economic activity remains weak

UK GDP in March continued to show signs of vulnerability, while May PMI indicators recorded a noticeable deterioration:

• composite index — around 48.5;
• services index — below the 50 mark.

The latter indicator is especially important, since services account for around 80% of the British economy.

For 2026, GDP growth is expected at only 0.9%, with unemployment rising to 5.5%. Against this backdrop, an interest-rate hike becomes a serious risk for the real estate market and consumer activity.

The situation in the Middle East remains an additional factor of uncertainty. The conflict threatens supplies of oil, gas, diesel fuel, and aviation kerosene. Rising energy prices support inflation expectations and yields on British government bonds (gilts), while simultaneously pressuring FTSE sectors focused on domestic demand.

If oil consolidates above $90 per barrel, it will become increasingly difficult for the Bank of England to justify keeping the current rate unchanged for a long period without additional policy tightening.

And what is the result?

The probability of a rate hike at the upcoming meeting can be estimated in the range of 25–35%.

An increase to 4.00% is possible only if the MPC considers the energy shock to be the beginning of a new sustained inflation wave, rather than a temporary factor. At the same time, the launch of a full-scale cycle of further tightening at the current stage looks unlikely.

For the pound sterling, expectations of tighter policy remain a positive factor and may support growth in the British currency. However, weak PMI figures and persistent recession risks significantly limit GBP’s upside potential.

Without confirmation of a sustained rise in services inflation, any upward move may quickly shift into a profit-taking phase.

A separate point worth considering is the alternative scenario. If the rate remains unchanged, but the number of supporters of a hike within the MPC rises from one to two or three people, the market reaction may be comparable to the effect of an actual rate hike.

The pair most sensitive to any surprises from the Bank of England remains GBP/JPY. The Bank of Japan continues to maintain an extremely loose monetary policy, while Japanese rates remain near zero. Even moderate tightening by the Bank of England could noticeably increase the attractiveness of carry trade operations and strengthen demand for the pound against the yen.

So we act wisely and avoid unnecessary risks.

Profits to y’all!