Bank of England vote could spur GBP/USD jump
- The US dollar has fallen on fears that the Fed will not raise interest rates.
- Positive policy outlook, including the BoE’s hawkish rhetoric, will support the pound.
The US dollar suffered its sharpest fall in the last two weeks following Kevin Warsh’s intention to shift the Fed’s responsibility for bringing inflation back to the 2% target onto the financial markets. The new Fed Chair emphasised that the rally in Treasury yields is tightening financial conditions and holding back price growth. Inflation expectations remain at acceptable levels.
Investors interpreted this rhetoric as an intention to extend the pause and avoid tightening monetary policy for as long as possible. The probability of a federal funds rate hike in September has fallen from 75% to 65%, and the likelihood of two hikes in 2026 has dropped from 51% to 44%. This led to a weakening of the US dollar against major peers, despite falling stock indices, a rally in Treasury bond yields and rising oil prices against the backdrop of the escalating conflict in the Middle East.
However, Commerzbank believes that the rally in Brent crude will not necessarily weigh on the EURUSD and GBPUSD. It is leading to a rise in inflation expectations in Europe and to an increased likelihood of policy tightening by the ECB and the Bank of England. At the same time, inflation expectations in the US are not rising, nor is the likelihood of Fed monetary tightening. According to DBS Group, Kevin Warsh’s withdrawal of his forward guidance is leaving US markets and the dollar stumbling in the dark. By contrast, the euro and the pound may benefit from central banks maintaining their guidance on the future path of interest rates.
In this regard, the BoE meeting could provide sterling support. Investors do not expect a rise in the repo rate but anticipate hawkish rhetoric amid the escalating conflict in the Middle East and rising energy prices. Oil and gas prices are higher than they were at the time of the Committee’s previous meeting.
Despite the Bank of England holding rates for a fifth consecutive meeting, the futures market is pricing in a 65% chance of a hike in September and nearly two increases by the end of this year. Bloomberg experts forecast that only two of the nine MPC members will vote for a rate hike. If the number is higher, GBPUSD could rise.
Summary: GBPUSD may rise if the BoE holds rates but signals a hawkish policy stance, while a dovish Fed outlook pressures the US dollar.
Author
Alexander Kuptsikevich, a senior market analyst at FxPro, has been with the company since its foundation. From time to time, he gives commentaries on radio and television. He publishes in major economic and socio-political media.
