Pound gives back BoE rate-hike gains ahead of Friday's US payrolls

A halt at 1.3500 leaves GBP/USD heading for its first decline in seven sessions.
Despite all nine members backing a hike, BoE Governor Bailey cautioned against expecting a series of increases.
Friday's October payrolls release is expected to show 65K, compared with September's 29K.

The Pound's six-session advance has run out of steam just above 1.3500, leaving GBP/USD near 1.3450 and heading for its first decline in seven sessions. On Thursday, the Bank of England (BoE) lifted the UK's Bank Rate to 4%, a move fully priced in by markets. The pair had touched 1.3500 on Wednesday, its strongest level since mid-September, before revisiting it on Thursday.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

While all nine members supported an increase, one favoured a half-point rise. BoE Governor Bailey cautioned that the decision should not be interpreted as the start of a series of hikes. From September's 3.5%, inflation is projected by the BoE to reach around 5% by mid-2027. Markets now assign close to a one-in-two chance of a December hike, up from one in three ahead of the vote, and price in a further three-quarters of a point by the end of 2027.

Following Wednesday's slide to a one-month low after the Democrats won both houses of Congress, the Dollar has regained some ground. Jobless claims declined to 189K, below the 196K forecast, while third-quarter unit labour costs dropped 0.7% rather than rising 0.6% as expected. Pricing for a December Fed hike has eased to around 70%, compared with above 80% on Wednesday. At 4%, the Bank Rate now equals the upper end of the Fed's 3.75%-4.00% range.

Which releases and speeches are next?

Friday's October Nonfarm Payrolls (NFP) release, scheduled for 13:30 GMT, is forecast at 65K against September's 29K. Also on Friday, New York Fed President Williams is due to speak at 09:30 GMT, followed by Fed Governor Bowman at 17:15 GMT. The next release is October's Consumer Price Index (CPI), due at 13:30 GMT on Tuesday, November 10, with a 0.3% increase forecast after 0.6%. These releases and remarks will all inform the December 8-9 Fed meeting.

Monday brings remarks from BoE Governor Bailey at 17:25 GMT. On Tuesday, BoE Deputy Governor Lombardelli speaks at 12:30 GMT, followed by BoE Chief Economist Pill at 18:30 GMT. After the previous 0.5% growth reading, third-quarter Gross Domestic Product (GDP) is scheduled for 07:00 GMT on Thursday, November 12. The release will inform the BoE's December meeting.

What do the charts indicate?

About a quarter of the advance from the October 28 low just above 1.3250 has been retraced, with Thursday's bar contained within Wednesday's range. GBP/USD remains above the 50-day Exponential Moving Average (EMA), which sits just above 1.3350, and the 200-day EMA, positioned just below 1.3400. The 50-day average nevertheless remains beneath the 200-day. Momentum on the daily chart is in overbought territory and has begun turning down.

Daily chart for GBP/USD

Pound Sterling: frequently asked questions

What should you know about the Pound Sterling?

As the United Kingdom's official currency, the Pound Sterling (GBP) is also the world's oldest currency, dating to 886 AD. Figures for 2022 place it fourth among currencies traded in the global foreign exchange (FX) market, with a 12% share of all transactions and average daily turnover of $630 billion. Among its main trading pairs, GBP/USD, known as ‘Cable’, represents 11% of FX transactions. GBP/JPY, which traders call the ‘Dragon’, accounts for 3%, while EUR/GBP accounts for 2%. Responsibility for issuing the Pound Sterling rests with the Bank of England (BoE).

Why do Bank of England decisions matter for the Pound Sterling?

Monetary policy set by the Bank of England is the most important driver of the Pound Sterling's value. Decisions hinge on whether the BoE has met its central objective of “price stability” – inflation holding steady at around 2%. Adjusting interest rates is its main means of achieving that objective. To curb excessively high inflation, the BoE seeks to raise borrowing costs through interest rate increases, making credit more expensive for households and businesses. GBP generally benefits, since higher rates make the UK a more appealing destination for global investors' funds. By contrast, inflation falling too low signals a slowdown in economic growth. The BoE would then consider cutting rates to make credit cheaper, encouraging businesses to borrow more for investment in projects that generate growth.

Why does economic data matter for the Pound's value?

By indicating the economy's health, data releases can move the Pound Sterling. GDP, Manufacturing and Services PMIs, and employment figures are among the indicators that can shape GBP's direction. Sterling benefits from economic strength, which draws in more overseas investment and may also prompt the BoE to raise interest rates, directly strengthening GBP. Weak economic readings, on the other hand, are likely to weigh on the Pound Sterling.

Why is the Trade Balance important for the Pound?

The Trade Balance is another key release for the Pound Sterling, showing the gap between a country's export earnings and its import spending during a specified period. Strong overseas demand for a country's exports benefits its currency through the additional demand from foreign buyers purchasing those goods. A positive net Trade Balance therefore supports a currency, whereas a negative balance has the opposite effect.