GBP/USD forecast: The BoE’s hawkish pause is not a game changer.

The GBP/USD was keeping firm near the 1.22 level ahead of the Bank of England’s rate decision, benefiting slightly from the dollar’s lower reaction to what was a hawkish hold from the Federal Reserve rate decision. Nobody expected the Bank of England to raise interest rates, with the market predicting a 93% chance of a second straight hold after 15 consecutive raises. The reasoning is that the Bank of England is convinced that previous rate hikes are working and that it will take some time to observe the full impact on inflation and the economy. In fact, inflation data has been showing symptoms of cooling, and we have seen persistent weakness in GDP data, as well as a weakening labor market. Furthermore, the Bank of England was unlikely to depart from the Fed and the ECB by raising interest rates again.

The Bank of England keeps interest rates unchanged at 5.25%.

The Bank of England did not disappoint market expectations by keeping interest rates unchanged at 5.25%. However, this decision was not reached unanimously. In fact, it’s the opposite. The Bank of England voted 6-3 to keep interest rates constant, implying that some members wanted to raise rates again. The split demonstrates that it is far too early to consider rate reduction and explains why the pound initially rose.According to the BoE, the decision was “finely balanced” between no change and an increase. Meanwhile, BoE Governor Bailey stated that the MPC would be watching “closely” to see if future rate hikes were required, and that it is “much too early to be thinking about rate cuts.” Greene, Haskel, and Mann voted to increase by 25 basis points.

Inflation to remain over goal for a longer period of time: BoE

FX traders were also interested in the central bank’s forecasts, albeit whether they should be trusted is a discussion for another day.  

Inflation remains high in comparison to other G7 countries at 6.7%, but it has finally begun to fall in recent months after being in double digits for several months until April. Clearly, more progress is required on this front before the Bank of England even considers rate decreases. According to the central bank’s most recent projections, inflation will be 4.6% by the fourth quarter of this year, which is lower than the central bank predicted in August (4.93%). However, the Bank of England expects inflation to reach around 3.1% in a year, up from 2.82% earlier, and now expects inflation to fall below the 2% target in Q4 2025 rather than Q2.

In terms of growth, the Bank of England still expects the economy to expand by half a percent this year but no growth next year.

Here are the Bank of England’s most recent economic projections:

Inflation:

• 2023 4.75% (prev. 5.00%)

• 2024 3.25% (prev. 2.5%)

• 2025 2% (prev. 1.50%)

Growth:

• 2023 0.50% (prev. 0.50%)

• 2024 0% (prev. 0.50%)

• 2025 0.25% (prev. 0.25%)

As a result, the BoE believes inflation will be stickier than originally predicted, implying that interest rates will remain high for a longer period of time. However, recent PMI statistics indicate that growth is anemic, if not negative. Business activity fell for the third month in a row in October, stoking fears that the UK is heading for a recession. The market anticipates that the Bank of England will decrease interest rates next, however this is not expected until the second half of next year.

The pound initially reacted positively, rising approximately 20 pips in response to the news. Markets interpreted the rate decision and the Bank of England’s rhetoric as moderately hawkish. Perhaps some investors expected a more dovish vote split. Furthermore, with inflation not forecast to dip below 2% in the closing months of 2025, we will likely have to wait longer than planned for rate reduction.

For the time being, the Fed’s aggressive stance fails to push the dollar higher.

Surprisingly, the dollar’s reaction to the Fed’s hawkish stance was bearish. Investors appear to think that the Fed’s decision to maintain interest rates steady for the second meeting in a row suggests the economy is in good shape.

As it nears the end of its historic tightening campaign, the Fed is arguing that interest rates will only fall from here. The reduction in US bond yields has bolstered the appeal of other high-beta currencies such as the Aussie and Kiwi, while also helping equity markets. Dollar bears now expect some weakness in US data to help knock the currency off its perch. The weaker-than-expected release of ISM manufacturing PMI data on Wednesday caused the US dollar to fall sharply intraday. Nonetheless, the more robust data releases elicited no positive reaction. All of the good news for the dollar appears to have been priced in by the market. However, with the imminent data release, this premise will be put to the test time and again. So yet, the trend of US data has not moved downward enough to justify demands for a US dollar top.

GBP/USD forecast: What comes next for the cable?

The GBP/USD economic calendar continues hectic, with top-tier US data due out on Friday. There isn’t much to look forward to from the UK until next Friday’s GDP and other significant data releases.

On Friday, the US NFP and ISM services PMI were among the significant US data highlights.

The “higher for longer” story will be put to the test once more on Friday, when the October US jobs report and the ISM services PMI figures are released. As previously stated, with the dollar having risen strongly in the last three months or so, much of the optimism may have been priced in. It will take a lot more effort for the dollar to accelerate from here. To put it another way, if incoming US data disappoint, the US dollar’s decline may be more dramatic than would otherwise be the case. As a result, the dollar bulls will need to see excellent figures on Friday, or else the dollar’s bullish trend may reverse.

Next week’s highlights include UK GP and US consumer sentiment.

The week ahead is devoid of key data releases until Friday, when we get important data from both sides of the Atlantic that should have an impact on the GBP/USD outlook.

UK growth data for September and the third quarter, as well as construction output, industrial production, and a few other macro indicators, will be announced. These data releases will help define investor views regarding the future course of UK interest rates. The BoE is almost certainly done raising interest rates, but the essential question is how long rates will remain high. If these macroeconomic indicators signal to unexpected strength in the UK economy, the pound should benefit.

The week ahead was always going to be calmer for US data after this week’s data explosion. The durability of the US economy, as well as the prospect of higher inflation for an extended period of time, drove the dollar to new highs for 2023. However, we saw some indicators of weakness in data this week, and if that becomes a trend, we could see a dollar reversal shortly. The release of UoM Consumer Sentiment data on Friday will be the centerpiece of next week’s US statistics.

GBP/USD technical Analysis