British Pound tests six-week highs as traders brace for BoE tightening
- GBP/USD rallies for the third consecutive day and reaches six-week highs at the 1.3420 area.
- UK Gilt yields dropped, and the Pound accelerated its recovery after the release of the UK's 2026 budget.
- Hopes of a BoE rate hike next week are providing additional support to the GBP.
The British Pound (GBP) rallies for the third consecutive day against the US Dollar (USD) on Friday, following a soothing UK budget earlier this week, with the focus on a widely expected interet rate hike by the Bank of England next week. The GBP/USD pair is pushing against six-week highs around 1.3420 as of writing, on track to complete a three-week rally.
UK Nationwide Housing Prices remained flat in October, according to data released on Friday, beating expectations of a 0.2% contraction and following a 0.3% decline in September.
UK budget calmed markets and sent the Pound rallying
Pound traders keep celebrating a neutral UK budget, which had triggered some anxiety amid the high public debt and the turmoil in bond markets. The budget seems to have calmed markets, at least for now. The yield of the UK 10-year bond has dropped nearly 10 basis points since Wednesday, the day when the budget was released, which has provided a fresh boost to the Sterling.
Investors' focus has shifted to the Bank of England, which will release its monetary policy decision next week. Recent macroeconomic data revealed that the UK economy keeps growing, while inflation remains well above the bank’s target, which has prompted markets to nearly fully price in a 25-basis-points rate hike next week.
Regarding the USD, Analysts at ING warn about the US midterm elections risk: “A Democratic sweep is trading around 68% in prediction markets,” which, according to the experts, “could be seen as slightly negative for the US dollar from a few angles,” ranging from “higher risk of government shutdown and gridlock on debt ceiling negotiations” to “potential damage to already shaky AI-related sentiment.” Against that backdrop, ING concludes that they “would be cautious in chasing the USD upside in the next few days.”
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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