British Pound holds gains above 1.3400 as hot CPI data fuels BoE rate hike bets
- GBP/USD trades with mild gains around 1.3405 in Friday’s early Asian session.
- BoE is widely expected to increase borrowing costs at its next meeting on November 5.
- Fed is expected to hold rates in October but hike again in December, a Reuters poll said.
The GBP/USD pair posts modest gains near 1.3405 during the early Asian session on Friday. The British Pound (GBP) edges higher against the US Dollar (USD) as hotter UK September Consumer Price Index (CPI) data has bolstered expectations of a more hawkish stance from the Bank of England (BoE). The UK Retail Sales report will be published later in the day.
UK inflation reaches an 11-month high after a surge in petrol and diesel costs, the Office for National Statistics revealed on Wednesday. The Consumer Price Index (CPI) climbed 3.5% YoY in September, compared to 3.1% in the previous month, hotter than expectations of 3.4%. Meanwhile, the core CPI inflation rose to 2.8% YoY in September, up from 2.6% in August, above the market consensus of 2.7%.
Markets are pricing in a 98% probability that the BoE raises its key interest rate by 25 basis points (bps) to 4.0% next month, according to LSEG data. This would be its first hike since 2023. The majority of traders are also pricing in a further hike of the same size at the central bank’s final meeting of the year in December.
Federal Reserve (Fed) Chair Kevin Warsh refused to give any clear hint about how soon another interest rate hike might come. The US central bank is likely to skip lifting interest rates at its upcoming October policy meeting and deliver a hike in December, according to nearly all economists polled by Reuters, as policymakers signal patience even as stubborn inflation argues for a tougher response.
Sterling supported by BoE tightening expectations as EUR/GBP stays offered
Analysts at ING argue that recent Pound strength in EUR/GBP is not simply a reflection of domestic political popularity, noting that “it seems like sterling is riding on the coat-tails of PM Andy Burnham's popularity. In reality, it looks like there is both independent sterling strength and independent euro weakness at play in EUR/GBP.” The bank acknowledges that “earlier this summer, we had felt that sterling gains would not last,” but says that “greater market confidence in a Bank of England tightening cycle – we look for 25bp hikes in February and November – makes sterling a high-carry European currency.”
Looking ahead, ING expects fiscal developments to have limited market impact, stating that “next week's UK budget looks unlikely to derail the recent EUR/GBP break below 0.8400.” With “the euro still having plenty of room to drop on French politics,” the bank sees scope for the cross to remain under pressure, judging that “EUR/GBP can stay offered in a 0.8360-0,8430 range for the time being.”
Greene flags stalled wage disinflation, keeping BoE hawkish bias intact
Greene’s 7.4/10 FXS Speechtracker score matches the historic average, signaling a steady but clearly hawkish stance rather than an escalation in tone. Emphasis on stalled wage disinflation at levels inconsistent with 2% inflation, alongside a belief that policy should proactively lean against second-round effects, reinforces a bias toward keeping policy tight for longer and limits near-term downside for the Pound.
The remark that the risk of second-round effects is greater than previously thought, even as forward-looking data point to pay growth closer to 3.5%, suggests Greene sees the labor market as still too firm to safely relax policy. References to surprising economic resilience and labor market slack potentially having peaked further support a hawkish interpretation, implying that rate cuts are likely to be delayed and that the Pound may remain supported versus the Euro and the Dollar.
Technical Analysis: GBP/USD keeps a bullish vibe above the 100-day SMA
In the daily chart, GBP/USD retains a mildly bullish bias as spot holds above the 100-day simple moving average (SMA) and comfortably over the Bollinger middle band. Price is edging toward the upper Bollinger band, signaling a test of short-term topside levels, while the Relative Strength Index (14) at 58.6 sits in positive territory without yet signaling overbought conditions, which suggests room for further upside before momentum becomes stretched.
On the topside, immediate resistance is defined by the upper Bollinger band at 1.3412, where a clear daily close above would open the way for a continuation of the recent recovery. On the downside, initial support is offered by the 100-day SMA at 1.3390, with deeper cushions emerging at the Bollinger middle band around 1.3275 and then the lower band near 1.3140, levels that should contain corrective pullbacks while the broader bullish tone persists.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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