Sterling may struggle to extend its recovery, having bounced from a session low near 1.3350 after the widely expected 6-3 BoE MPC vote to hold bank rate steady, the bid emerging as traders looking further out the short-term curve infer the U.S. and UK will travel similar monetary policy paths into Q4 and 2027.

Though cable appears to be stabilizing, headwinds persist. Near-term, the UK autumn budget due in October is a threat, with PM Andy Burnham needing to navigate a tenuous fiscal position to placate bond vigilantes. To that end, the BoE said long-dated gilts in its Asset Purchase Facility will be replaced as they mature and APF gilt sales paused until April 2027 — ostensibly to soothe fiscal nerves as UK 10- and 30-year yields remain elevated.

Today's hold carried hawkish overtones, the BoE flagging the ongoing Middle East conflict and its inflationary drag and forecasting CPI above 4% in early 2027 — paving the way for hikes. LSEG's IRPR implies roughly 36bp of BoE tightening by the December 2026 meeting and up to 87bp by December 2027, a trajectory close to the Fed's, which may stall further sterling declines.

The geopolitical tensions in the Middle East are expected to impact most developed economies similarly, keeping oil prices and inflation elevated. For the UK, fiscal risk now takes the spotlight: if the budget disappoints and UK yields outrun U.S. Treasuries, GBP/USD likely resumes lower, with the July 28 low at 1.3274 and June 24 low at 1.3140 as downside targets.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)