UK natural gas prices surge, market focuses on Bank of England’s future rate hike path

⑴ The market has fully priced in a 25 basis point rate hike by the Bank of England in November to 4.00%. The latest inflation and employment data support this rate hike. The core focus for the short-term trend of the pound lies in the policy guidance after November. ⑵ The current market pricing expects a total of four rate hikes by the summer of 2027. It is difficult for the central bank to signal a more hawkish stance than the market anticipates. If the Monetary Policy Committee fails to confirm this rate hike path, the pound is likely to face a correction. ⑶ Natural gas and crude oil prices continue to rise, increasing the risk of second-round inflation effects. The current UK natural gas price is around 235 pence per heat unit, far above the central bank’s baseline scenario and even surpassing the upper limit of the pessimistic scenario, forcing the central bank to maintain a relatively hawkish stance. ⑷ Even with a rate hike, the pound is unlikely to experience sustained strength. Rising energy prices are deteriorating trade conditions, which will impact subsequent economic growth. Coupled with the drag of the rate hike, the pound’s upside space will be suppressed, and it is likely to maintain a narrow range of fluctuations against the US dollar within the year.