Sterling's Rally Unlikely to Be Sustained as Bank of England Is Set to Resume Rate Cuts, Says Mitsubishi UFG

08:55 AM EST, 12/02/2025 (MT Newswires) -- Sterling (GBP) has continued to trade at stronger levels at the start of this week after staging a relief rally following last week's Fall Statement, said MUFG.

The broad-based correction lower for the US dollar (USD) helped to lift cable up to a high on Monday at 1.3275 as it moves further above the low from early November at 1.3010, wrote the bank in a note to clients. Similarly, EUR/GBP remains below the 0.8800 level after hitting a high of 0.8865 in mid-November.

There was initial relief that the United Kingdom Budget didn't contain any nasty surprises to destabilize the Gilt market, and that the government took the opportunity to raise fiscal headroom to just above 20 billion pounds, stated MUFG.

However, there are still doubts over the government's tax and spend strategy, given the planned tax hikes are back-loaded to kick in around the timing of the next election, while spending is more front-loaded, pointed out the bank.

The lack of immediate fiscal tightening doesn't provide additional impetus for the Bank of England to cut rates more in the coming years, yet the policy measures will help to lower inflation in the year ahead, potentially creating some more leeway to cut rates, added MUFG.

The bank still expects the BoE to resume rate cuts this month, encouraged by labor market weakness, including slowing wage growth, and recent evidence of softer inflation, which is likely to be sufficient to encourage Governor Andrew Bailey to vote for a cut.

BoE Monetary Policy Committee member Megan Greene has also sounded less hawkish recently, but emphasized on Monday that "I would need to see the labour market deteriorate more" to vote for a cut.

It suggests Greene is likely to vote to keep rates on hold again this month, according to MUFG. However with only one additional member likely required to vote for a cut to get a majority on the MPC, the bank still believes the BoE is on track to cut rates, and encourages a weaker sterling heading into year-end.

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