Sterling Hits Two-Week High as Bailey Denies 'Secret Plan' on Rate Hikes

The British pound climbed to a two-week high against the dollar on Wednesday, reaching $1.3545, its strongest level since August 28. The currency's resilience came even as oil prices surged above $100 a barrel amid widening Middle East conflict, which has pushed energy costs sharply higher.

Britain, heavily dependent on energy imports, saw consumer inflation rise to 2.9% in July from June's 15-month low of 2.6%. Money markets currently show traders do not expect the Bank of England to act at its meeting next week, but they do price in at least two rate hikes by March, with a 40% chance of a third. In contrast, the Federal Reserve is expected to raise rates only twice by that point.

Sterling has been one of the better-performing major currencies this year, gaining 0.5% against the dollar, while the euro has fallen 1% and the yen 2%.

Much of the pound's strength stems from expectations that the BoE will need to tighten policy, especially as growth holds up. However, Governor Andrew Bailey pushed back against the idea that rate hikes are inevitable. "What I want to dispel is the idea that we've really got a secret plan, we know where we're going to go to and it's unconditional," he told lawmakers on Tuesday.

ING strategists note that higher energy prices are influencing rate expectations. Since the start of the Iran war, every $10 increase in Brent has added about 15 basis points to UK two-year rates, compared with 11 basis points for the euro zone and 8 for the US. ING's Michiel Tukker said the market's rate outlook appears overdone, but uncertainty over oil and fiscal risks, including the Autumn Budget next month, complicate the pound's prospects. "Only once the predictability of oil prices improves do we see scope for tactical opportunities," he added.