GBP/USD steadies below 1.3400 as traders digest BoE policy update and US inflation data
- GBP/USD steadies following the previous day’s volatile price swings and an intraday pullback.
- The BoE’s hawkish support the GBP and spot prices, though the lack of USD selling caps gains.
- The broader fundamental backdrop and acceptance above the 200-day SMA favor bullish traders.
The GBP/USD pair stalls the previous day's pullback from the vicinity of mid-1.3400s and a nearly two-month high, though it struggles to attract meaningful buyers during the Asian session on Friday. Spot prices currently trade around the 1.3380-1.3385 region, up only 0.05% for the day, amid mixed cues.
The British Pound (GBP) draws support from the Bank of England's (BoE) hawkish rate cut on Thursday, which, in turn, is seen as a key factor acting as a tailwind for the GBP/USD pair. As was expected, the BoE MPC voted 5-4 to lower the benchmark interest rate by 25 basis points (bps) to 3.75%. A close vote split, however, revealed differences within the committee, especially after this week's inflation surprise. This, in turn, forced investors to scale back their expectations for more aggressive easing next year.
Apart from this, the emergence of some intraday US Dollar (USD) selling following the release of softer US consumer inflation figures provides an additional boost to the GBP/USD pair. Data published by the US Bureau of Labor Statistics (BLS) showed that the headline US Consumer Price Index (CPI) rose 2.7% from a year earlier in November, falling short of the 3.1% expected. Moreover, the core CPI, which excludes volatile food and energy prices, also missed expectations and rose by 2.6% YoY last month.
The crucial data reaffirmed market bets for more interest rate cuts by the US Federal Reserve (Fed) in 2026 and weighed on the USD. The initial market reaction, however, turned out to be short-lived, which, in turn, prompted some intraday selling around the GBP/USD pair. Meanwhile, dovish Fed expectations keep the USD bulls on the defensive and assists the currency pair to defend a technically significant 200-day Simple Moving Average (SMA). This, in turn, backs the case for a further appreciating move.
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.
Recommended Articles
