GBP/USD advances after Democrats’ midterm victory as BoE rate decision approaches

Above 1.3475, GBP/USD is trading at a six-week high as the Bank of England rate decision approaches. The U.S. dollar has weakened following the Democrats' capture of full control of Congress in the U.S. midterm elections.

USD weakens as Democrats secure Congress

Both the House and the Senate have come under Democratic control following the party's sweeping midterm victory. With investors expecting the Democrats to restrain government spending, Treasury yields have declined, dragging the U.S. dollar lower for now.

One risk, however, is that constraints on his domestic authority could lead Trump to concentrate entirely on foreign policy. Should hostilities in the Middle East and against Iran escalate, a further rise in oil prices could increase inflationary pressures and push Treasury yields and the U.S. dollar higher.

Friday's nonfarm payroll report will provide another focus alongside the midterm results. Markets put the probability of a December rate hike at 79%; a strong NFP figure could strengthen those expectations and help the U.S. dollar regain ground.

BoE approaches decision with a rate rise expected

Thursday's interest rate announcement from the Bank of England is scheduled for 12:00 midday GMT.

A rise of 25 basis points would take rates to 4%, as expected, and mark the BoE's first increase since August 2023.

UK inflation stands at 3.5% ahead of the decision, with the Iran war continuing to push oil and energy prices higher. Core inflation has also picked up, reaching 2.8% year-on-year in September after 2.6% in August.

At 3.7%, services inflation was also higher than August's 3.4%. The Bank of England follows this indicator closely as a measure of domestic price pressures. Together with evidence that the labour market is stabilising as unemployment falls, the increase has further underpinned expectations of a November hike.

With a 97% probability of the move already reflected in market pricing, the meeting minutes, revised growth and inflation forecasts, and Bank Governor Andrew Bailey's press conference will draw attention.

For 2027, the Office for Budget Responsibility now forecasts growth of 1%, having lowered its official projection from 1.6%.

Higher energy costs are expected to fuel inflation in 2027, as companies across the economy, including food manufacturers and airlines, respond by increasing prices.

Market pricing nonetheless implies three additional rate rises across the Bank of England's February, March and April meetings in 2027. That looks somewhat aggressive and would leave Bank Rate between 4.75% and 5%.

No guidance on the planned number of increases is expected from the Bank of England. The minutes, or Governor Bailey himself, may nevertheless indicate that the terminal rate is unlikely to reach the level markets currently price in.

A challenge from the Bank of England to aggressive rate rise expectations could give the hike a dovish character, weighing on GBP. By contrast, higher inflation forecasts from the central bank could lend the increase a hawkish interpretation and push GBP/USD further upwards.

GBP/USD technical analysis points towards 1.35

The recovery in GBP/USD from support around 1.32 has carried the pair through its downward trend line and above both the 50 EMA and the 200 EMA. As it advances towards 1.35, the technical picture remains constructive.

An RSI reading above 50 lends support to the bulls, whose next objective will be to extend the advance beyond resistance around 1.35. Above that zone, attention would shift to 1.36 and then 1.3650, around the August high.

Below the market, support lies at the moving averages: the 200 EMA at 1.34 and the 50 EMA at 1.3360. Losing those levels would leave the 1.33 support zone and the 27 October swing low in view, followed by 1.32.