The pound is near a two-week high, and the central bank governor says there are currently no plans for a secret interest rate hike.

The pound strengthened on Wednesday, last trading at $1.3559, nearing its highest level since August 28. Year-to-date, the pound has appreciated by about 0.5% against the dollar, making it one of the better-performing major currencies. Even though Bank of England Governor Andrew Bailey downplayed the certainty of an interest rate hike the previous day, the market is still betting on future rate increases from the Bank of England amid soaring energy prices and rising inflation.

According to Reuters, Bailey explicitly denied the central bank's predetermined interest rate hike path during a parliamentary hearing on Tuesday, stating his intention to dispel the market's perception that the central bank "has a secret plan and knows where we're going." The money market has already priced in at least two rate hikes and is betting on a roughly 40% probability of another hike before March next year, indicating a significant divergence between market pricing and the central bank's statements.

Meanwhile, the ongoing conflict in the Middle East continues to drive up energy prices, with Brent crude oil breaking through $100 per barrel and European natural gas prices roughly doubling since pre-war levels. The UK's July CPI rose to 2.9% year-on-year, up from 2.6% in June, and the energy shock is once again becoming a key variable influencing UK interest rates and the pound's trajectory.

With energy and fiscal risks intertwined, the future trend of the pound remains uncertain.

According to Reuters, ING data shows that since the outbreak of the Middle East conflict, for every $10 increase in Brent crude oil prices, the UK's two-year interest rate has risen by an average of about 15 basis points, higher than the 11 basis points in the Eurozone and the 8 basis points in the United States, indicating that UK interest rates are more sensitive to energy price shocks.

However, ING strategist Michiel Tukker believes the market may have already overpriced a Bank of England rate hike. Significant uncertainty remains regarding oil price movements, and with the UK autumn budget approaching, current interest rate expectations face the risk of revision. The money market also does not currently expect the Bank of England to take action at next week's meeting.

High energy prices are increasing the policy challenges for the Bank of England. Continued oil price increases could further push up inflation and strengthen expectations of interest rate hikes, but if the energy shock eases, current interest rate pricing could also see a pullback.

Furthermore, the autumn budget will be another major variable influencing the pound's exchange rate, as fiscal policy could further alter market assessments of inflation and interest rate paths. Tukker previously stated that, given the possibility of oil prices retesting $100, no clear trading opportunities have yet emerged.

In contrast, the market has priced in a more moderate rate hike by the Federal Reserve during the same period, and the interest rate differential between the UK and the US continues to support the pound to some extent . Looking ahead, oil prices, inflation, and fiscal policy will be key factors influencing the pound's trajectory.

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