Rabobank’s baseline scenario is for the Bank of England to keep policy unchanged through the rest of the year, after softer UK inflation and a looser labour market backdrop. UK May CPI came in at 2.8% year-on-year for the headline rate, and the subsequent fall in oil prices is presented as a factor that could restrain inflation expectations.
The note contrasts this view with market pricing of around 20 bps of tightening over a six-month horizon. It also frames the Monetary Policy Committee (MPC) as requiring clear evidence of second-round effects from another prolonged spell of high energy prices before backing a rate rise. The report adds that any further repricing of BoE hike expectations could weigh on GBP and lift EUR/GBP over a one- to three-month window, while separately stating the story was corrected on June 30 at 13:30 GMT to reflect a 2026, rather than 2024, timeframe in the headline.
Divergence Between Market Expectations And BoE Rate Path
We see a clear divergence between market expectations and the likely path of the Bank of England. The market is pricing in a rate hike, but we believe the BoE will hold rates steady for the rest of the year. This creates a trading opportunity based on a probable market re-pricing.
This view is supported by the latest economic data showing momentum is slowing. Recent figures from the Office for National Statistics confirm UK unemployment has ticked up to 4.7%, and the May CPI inflation reading held at a manageable 2.8%, far below the peaks seen just a few years ago. Furthermore, with Brent crude prices falling back below $80 a barrel, a major source of inflationary pressure is diminishing.
The market’s current pricing for a 20 basis point hike within six months now appears overly aggressive. As traders unwind these expectations, we anticipate a drop in short-term UK interest rate yields. This adjustment will almost certainly weigh on the British pound.
Trading Strategies Amid Rate And Currency Repricing
For interest rate traders, this suggests a strategy of buying SONIA futures contracts maturing in late 2026. This position profits as the market reprices away from a hike and towards a stable rate environment. It is a direct play on the view that the BoE will remain on the sidelines.
In the foreign exchange market, we see value in positioning for a weaker pound, specifically against the euro. Buying EUR/GBP call options with a three-month expiry allows for a defined-risk way to profit from a move higher in the pair. This aligns with the expectation that monetary policy divergence will favour the euro over sterling in the coming weeks.
