UK data miss expectations across the board, and market expectations for a Bank of England rate hike in 2026 have cooled significantly.
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⑴ A series of UK data released last week showed weak performance, leading investors to lower their expectations for the Bank of England to raise rates in the coming months. Employment, inflation, retail sales, and the preliminary purchasing managers' index all came in below forecast levels. ⑵ The weak data eased market concerns about aggressive rate hikes from the Bank of England. Currently, investors expect the Bank of England to implement a single 25 basis point rate hike in 2026, with the probability of a second hike dropping to 60%. ⑶ Prior to last week’s data release, the market had fully priced in two rate hikes by the Bank of England in 2026. The significant adjustment in expectations reflects how the economic slowdown is constraining the path of monetary policy. ⑷ From a trading sentiment perspective, the clear weakening of the UK’s economic momentum presents greater concerns for the central bank when tightening policy. If data continues to disappoint, it is possible that the market will further lower rate hike expectations, or even begin discussing the possibility of rate cuts. Sterling exchange rates and UK government bond yields may continue to face fundamental pressures in the short term.
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