Sterling held up relatively well on Wednesday as the dollar rallied on hawkish Fed commentary from Powell and another crude spike. Overnight, Iran targeted a major LNG facility in Qatar, sending European gas prices up as much as 35% and Brent surging 6.5% to $114/barrel. This is dramatically reshaping the rate outlook. Money markets moved swiftly, pricing 38bps of BoE rate hikes, up from just 22bps the day before. This morning's jobs data offered a rare bright spot, with unemployment beating consensus and payrolls recording their strongest monthly gain since September.
*Daily move - against G10 rates as of 17:00 GMT, 18.03.26
** Indicative rates - interbank rates as of 17:00 GMT, 18.03.26
Today's triple decision day arrives at a genuinely critical juncture. The BoE is certain to hold at 3.75%, but what was a near-certain cut just weeks ago has been completely repriced – markets are now leaning toward hikes by year-end as energy costs threaten to push inflation higher. Governor Bailey's tone will be everything. Any hawkish lean, acknowledging the risk that elevated energy prices feed through into core inflation, could offer near-term support for sterling. The ECB faces an identical bind, with traders pricing 59bps of rate hikes by December despite a fragile growth backdrop.
The UK jobs beat is welcome but shouldn't be over-read. Wage growth ex-bonuses slowed to 3.8% – its weakest in over five years – which limits the domestic inflationary argument for tightening. The stagflationary squeeze remains the core challenge: rising energy costs simultaneously threatening growth and prices puts central banks in an impossible position. For GBP, any upside is likely to be capped until there's clarity on how long this energy shock persists.
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