Sterling rose to its strongest level in seven weeks against the US dollar on Thursday as currency traders positioned for the Bank of England to raise interest rates for the first time since August 2023. The pound touched $1.3503 in Asian trading before settling near $1.346, according to Reuters, leaving it on course for a sixth consecutive daily gain.
The Monetary Policy Committee is widely expected to lift Bank Rate by a quarter of a percentage point to 4.0% from 3.75% when it announces its decision at 12:00 GMT. A rise would mark a sharp turn for a central bank that had been cutting rates from a 15-year high of 5.25%, and comes as an energy price shock linked to the war involving Iran pushes UK inflation further above target.
Sterling has also drawn support from broad weakness in the dollar, which remained on the back foot after Democrats secured majorities in both chambers of the US Congress in Tuesday’s midterm elections. The dollar index hovered around 101.4, its lowest level since late September.
Key Takeaways
- Sterling reached a seven-week high of $1.3503 against the dollar before trading near $1.346, according to Reuters.
- The Bank of England is expected to raise Bank Rate to 4.0% from 3.75%, its first increase since August 2023.
- UK consumer price inflation climbed to 3.5% in September, an 11-month high and well above the 2% target.
- Investors will focus on whether policymakers push back against market pricing for several more hikes in 2027.
Markets Price First Hike Since 2023
A Reuters poll of economists points to a 7-2 vote in favour of tightening, following a 6-3 decision to hold rates in September. External members Alan Taylor and Swati Dhingra are seen as the most likely to vote for no change, according to Reuters.
Economists broadly agree that the committee has little room to wait. Ellie Henderson, economist at Investec, told the Associated Press that members’ “patience with the recent rise in inflation has worn thin.” Stefan Koopman, senior macro strategist at Rabobank, said in a Reuters preview that policymakers’ “hands are increasingly being forced.”
The decision will be published alongside the Bank’s quarterly economic projections, and Governor Andrew Bailey and his deputies are scheduled to hold a press conference at 12:30 GMT.
Energy Shock Lifts Inflation Outlook
UK consumer price inflation rose to 3.5% in the year to September, the highest in 11 months and above the 3.0% the Bank had forecast in July. In September the central bank warned that inflation could climb above 4% early next year, according to Reuters.
The main driver has been a sharp increase in fuel costs. According to the Associated Press, bottlenecks in the Strait of Hormuz have squeezed global oil and gas supplies since the conflict began in late February, feeding through to household and business energy bills. Governor Bailey has said the Bank cannot wait for conclusive proof of so-called second-round effects on wages and prices before acting, according to Reuters.
The policy shift marks a clear change of tone from earlier this year, when geopolitical shocks were already pushing the Bank of England towards a more restrictive stance without a move in rates.
Dollar Weakness Adds to Support
The pound’s advance has been reinforced by a softer US currency. The dollar index edged down 0.06% to 101.41 in Asian trading after a 0.36% fall in the previous session, Reuters reported, as lower Treasury yields and improved risk appetite followed the US election results. The move extends the slide that began as Democratic gains lifted the euro and sterling earlier this week.
The euro rose 0.12% to $1.1241, while the yen firmed slightly to 158.25 per dollar. The single currency has recovered from the pressure it faced at the start of the week, when French political turmoil weighed on the euro.
Expectations for US monetary policy remain firmly hawkish. Traders now see an 81.2% probability that the Federal Reserve will raise rates by at least 25 basis points in December, up from 77.4% previously, according to CME’s FedWatch tool cited by Reuters.
Guidance on Further Tightening
With a rise largely priced in, attention has shifted to the Bank’s guidance on what comes next. Money markets are pricing three to four further quarter-point increases in 2027, which would take Bank Rate to between 4.75% and 5.0%, according to Reuters.
Some economists expect policymakers to resist that path. Oxford Economics said the minutes or Governor Bailey could signal that rates are unlikely to reach the levels implied by market pricing, a message that could cap sterling’s gains. Currency strategists have also noted that traders appear cautious about chasing the pound higher after a strong run.
Looking ahead, the Bank of England’s announcement at 12:00 GMT, and Mr Bailey’s press conference half an hour later, are set to dominate currency markets for the rest of the session, with US weekly jobless claims and a speech by European Central Bank President Christine Lagarde also due later on Thursday. Friday’s US government payrolls report will then offer the next test for the dollar as investors weigh a possible Federal Reserve rate rise in December against a more divided political landscape in Washington. Further coverage is available in our Forex section.
