GBP/USD Forecast: BoE rate hike expectations provide solid support for Sterling

Sterling is seen well anchored by the interest rate expectation in the UK next week as the Bank of England is set to convene on Thursday November 2. It is widely expected that the Bank of England’s Monetary Policy Committee will increase a benchmark Bank rate by 25 basis points to 0.50%. 

Sterling jumped as high as $1.3280 after stronger than expected UK GDP growth bolstered the case of interest rate hike, but fell as low as $1.3070 in the second half of the week. News of the European Central Bank extending its asset purchasing till at least next September, the US Senate clearing the way for Trump’s plan of tax cuts and rumors of Janet Yellen dropping off pool of potential Fed chairman candidates supported the US Dollar strongly.

Technically is Sterling in corrective mode lower. Fibonacci retracement of 38.2% of an uptrend from March 14 to September 15 at $1.3040 is now acting as first key support.  Should GBP/USD break the key Fibonacci support of $1.3040, next hurdle is the psychological level of $1.3000.

Interest rate outlook

With Sterling trading in a broadly bullish mode since the beginning of this year, expectations of a rate hike are broadly priced in the FX market, especially after the third quarter GDP report this week showed slightly stronger than expected growth of 1.5% y/y.

The Bank of England Governor Mark Carney will also be presenting Bank’s fresh macroeconomic forecast contained in November Inflation report and the accompanying press conference is perfect opportunity for him to justify the rate decision. Carney is expected to point out that current rate increase is meant to remove extraordinary monetary stimulus in place since Brexit referendum last year and that the UK economy proved resilient enough to stand it.

Inflation is expected to moderate with absorption of Brexit related shock to Sterling and its pass-through to consumer prices. That means that real, inflation-adjusted wages are expected to return to positive territory, supporting consumer spending that is key for the economic growth.

On the other side of Atlantic, the FOMC meeting is due on Wednesday. Although FOMC is widely expected to stay pat on rates in November, the case for December rate hike is likely to be strengthened, especially with next Friday’s US labor market report confirming strong post-hurricane recovery in jobs.