News & analysis
Sterling's 2026 Surge Faces a Budget Test, Credit Agricole Warns
The bank says stronger UK growth and hawkish rate bets have lifted the pound, but higher energy costs and Autumn Statement tax decisions could erode the household spending that underpins it.
Key points
- Credit Agricole says sterling's 2026 resilience against the dollar and outperformance versus the euro exceeded its expectations.
- The bank doubts the Bank of England will deliver the four rate hikes markets are pricing in the coming months.
- It warns gilt yields could turn into a negative signal for the pound if tighter financial conditions push policy expectations in a more dovish direction.
Sterling's gains against the dollar and its outperformance versus the euro in 2026 have run further than expected, and Credit Agricole attributes the move to stronger UK growth, hawkish Bank of England rate expectations and France's fiscal troubles. The bank cautions that those supports may be temporary, with higher energy costs, potential tax increases and spending restraint in the Autumn Statement threatening household purchasing power.
The pound has drawn support from three distinct sources, according to the bank. Stronger-than-anticipated UK growth has underpinned the currency, while investors have priced a hawkish path for Bank of England policy. France's fiscal difficulties have also made the UK look relatively more attractive, and the bank notes that Britain's mining-heavy equity market has appealed to investors diversifying away from US and Eurozone stocks. Those advantages could persist in the near term, but renewed UK growth underperformance could revive concerns about public finances and weaken demand for UK assets.
The rate expectations are where the bank parts company with the market. Traders are pricing four Bank of England rate hikes in the coming months, a degree of tightening Credit Agricole doubts the Monetary Policy Committee will deliver. It expects a November hike but a cautious central bank that avoids committing to further increases. That gap matters because a currency supported by aggressive rate bets is vulnerable if the bets are unwound: the bank warns gilt yields could become a negative signal for sterling if tighter financial conditions prompt a more dovish policy outlook.
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