Why is GBP/USD rising as Democrats win midterms and the BoE rate decision nears?

Pressure on the U.S. dollar has lifted GBP/USD above 1.3475 to a six-week high ahead of the Bank of England rate decision, after the Democrats secured full control of Congress in the U.S. midterm elections.

Why Is a Democratic Sweep Weighing on USD?

With a decisive midterm election victory, the Democrats have secured both the House and the Senate. Expectations that they will curb government spending are driving Treasury yields down and weighing on the U.S. dollar, at least for now.

Limited control over domestic affairs could, however, prompt Trump to focus entirely on foreign policy. If hostilities in the Middle East and against Iran intensify, oil prices could climb further, adding to inflationary pressures and lifting Treasury yields and the U.S. dollar.

Beyond the midterm outcome, Friday's nonfarm payroll report will be in focus. Markets currently assign a 79% probability to a December rate hike. A robust NFP reading could reinforce that view and support a recovery in the U.S. dollar.

What Could the BoE Rate Decision Signal?

Thursday at 12:00 midday GMT will see the Bank of England announce its interest rate decision.

A 25 basis point increase to 4% is expected from the BoE, which would be its first rate hike since August 2023.

Ahead of the meeting, UK inflation has climbed to 3.5% amid continued increases in oil and energy prices caused by the Iran war. September's core inflation reading also accelerated to 2.8% year-on-year, compared with 2.6% in August.

Services inflation increased to 3.7% from 3.4% in August. The Bank of England watches this measure closely for evidence of domestic price pressures. Alongside indications that the labour market is stabilising, with unemployment falling, the rise has further solidified expectations of a November hike.

With the move already 97% priced in, the focus will shift to the meeting minutes, Bank Governor Andrew Bailey's press conference and revised growth and inflation projections.

The Office for Budget Responsibility has cut its official 2027 growth forecast to 1% from 1.6%.

Energy costs, meanwhile, are expected to push inflation up in 2027 as businesses throughout the economy, ranging from food manufacturers to airlines, raise their prices.

Markets are nevertheless factoring in three further rate hikes at the Bank of England's February, March and April meetings in 2027, a path that appears somewhat aggressive. Those increases would bring Bank Rate to between 4.75% and 5%.

The Bank of England is not expected to indicate the number of hikes it plans. Even so, the minutes or Governor Bailey himself could suggest that the terminal rate is unlikely to rise as far as markets currently anticipate.

Resistance from the Bank of England to aggressive rate hike expectations could make this a dovish hike, putting pressure on GBP. Conversely, an upward revision to the central bank's inflation forecasts could be interpreted as a hawkish hike and give GBP/USD a further lift.

GBP/USD Technical Analysis: Can the Recovery Clear 1.35?

A rebound from the 1.32 support zone has taken GBP/USD above its descending trend line, the 50 EMA and the 200 EMA. The technical outlook remains constructive as the pair approaches 1.35.

With the RSI above 50 supporting the bullish case, buyers will seek a break above the 1.35 resistance zone. That would bring 1.36 into focus, followed by 1.3650, near the August high.

The moving averages provide downside support at 1.34 for the 200 EMA and 1.3360 for the 50 EMA. A break beneath these levels would expose the 1.33 support zone and the swing low of 27 October, with 1.32 the next level in focus.