GBP/USD climbs: Democrats secure midterm victory with BoE rate decision ahead

GBP/USD has climbed past 1.3475. The pair is at a six-week high ahead of the Bank of England rate decision, with the U.S. dollar under pressure after the Democrats gained complete control of Congress in the U.S. midterm elections.

USD declines after Democratic election sweep

Control of both the House and the Senate has passed to the Democrats after their sweeping midterm election win. Expectations of limits on government spending under the Democrats are pushing Treasury yields lower. For now, the U.S. dollar is falling alongside them.

Restrictions on Trump's domestic influence carry another risk: he could direct his entire focus towards foreign policy. If hostilities escalate in the Middle East and against Iran, oil prices could rise further. That could intensify inflationary pressures and drive up Treasury yields and the U.S. dollar.

Friday's nonfarm payroll report will also draw scrutiny, alongside the midterm results. With a December rate hike assigned a 79% probability in market pricing, a strong NFP release could entrench those expectations and aid a U.S. dollar recovery.

4% expected at BoE rate decision

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

A move to 4% through a 25 basis point increase is expected from the BoE. This would be its first rate rise since August 2023.

Against the backdrop of the Iran war, continued rises in oil and energy prices have taken UK inflation to 3.5% ahead of the meeting. September also brought an increase in core inflation to 2.8% year-on-year, from August's 2.6%.

Domestic price pressures are reflected in services inflation, an indicator closely tracked by the Bank of England. It reached 3.7%, compared with 3.4% in August. Falling unemployment has also pointed to a stabilising labour market. Together, these developments have further strengthened expectations for a November hike.

The move is already 97% priced in. Focus therefore rests on the updated growth and inflation projections, the meeting minutes and the press conference from Bank Governor Andrew Bailey.

A reduction in the Office for Budget Responsibility's official growth forecast leaves its 2027 projection at 1%, down from 1.6%.

For inflation, energy costs are expected to exert upward pressure in 2027. Businesses throughout the economy, from food manufacturers to airlines, are expected to raise prices in response.

Despite this, market pricing points to three further rate increases at the Bank of England's February, March and April meetings in 2027. This appears somewhat aggressive: the resulting Bank Rate would be between 4.75% and 5%.

An indication of how many hikes are planned is not expected from the Bank of England. Nevertheless, either the minutes or Governor Bailey himself could suggest that the terminal rate is unlikely to climb to the level markets currently anticipate.

For GBP, a dovish hike could bring downward pressure if the Bank of England challenges aggressive expectations for rate increases. An upward revision to its inflation forecasts, however, could give the hike a hawkish reading and support further GBP/USD gains.

1.35 in view: GBP/USD technical analysis

The 1.32 support zone provided the starting point for GBP/USD's recovery. Now above its falling trend line, the 50 EMA and the 200 EMA, the pair retains a constructive technical picture as it moves towards 1.35.

An RSI above 50 supports the bullish outlook. Buyers will aim to carry gains beyond resistance in the 1.35 zone, with 1.36 next in focus and then 1.3650, around the August high.

Support on a pullback comes from the 200 EMA at 1.34 and the 50 EMA at 1.3360. Below these moving averages, the 1.33 support zone and the 27 October swing low would become exposed. The next focus would then be 1.32.