Bank of England Preview: GBPUSD at 7-Week High

Sterling heads into today's Bank of England decision after six straight daily gains, with markets all but certain the central bank will raise rates for the first time in more than three years.

Rising inflation, steadier growth and a softer dollar after the US midterms have all lined up in the pound's favour, lifting GBP/USD to its highest level since 15 September. The pair has bounced hard from deeply oversold levels in late September, but it is still trading inside the range that has held for most of the year.

Latest Market Moves

·         GBP/USD had been trading around 1.3475 heading into Thursday's European session, having tested 1.3500 again overnight. On Wednesday it ranged between 1.3405 and 1.3503 before closing at 1.3470, its sixth straight daily gain.

·         The US Dollar Index dropped as low as 101.21 on Wednesday, its weakest level since 30 September, and was hovering near 101.4 in early Thursday trade.

·         EUR/GBP was sitting near 0.8340, not far from last week's low of 0.8324, which marked the pound's strongest level against the euro since March 2025.

·         The UK 10-year gilt yield eased around 5 basis points to roughly 5.11%, while the US 10-year Treasury yield dipped to its lowest since 10 September in Asian trade.

·         GBP/JPY was holding near 213.20, up around 1.4% on the week.

BoE Set for Its First Hike Since 2023

As if often the case, the question for markets is less whether the Bank hikes today and more what it signals about the next step.

The Bank Rate is expected to rise by a quarter point to 4.00% at noon UK time, the first increase since August 2023, with consensus looking for a 7-2 vote. Three of the nine policymakers already voted for a hike in September, when the Bank held at 3.75%.

Money markets are betting on three to four more increases in 2027, so the tone of the statement matters as much as the decision itself. Governor Andrew Bailey said in late September that holding rates was becoming more difficult, warning that "it's going to get harder to maintain that stance the longer we have high energy prices," and a signal that the Bank sees this as a one-off move would be the main risk for the pound.

Inflation Is Heading the Wrong Way

The case for a hike rests on an inflation rate that has climbed for three months running.

UK CPI inflation rose to 3.5% in September from 3.1% in August and 2.9% in July, beating forecasts of 3.4% and moving further away from the Bank's 2% target. Higher fuel prices did much of the damage, as the war with Iran kept energy costs elevated.

Core inflation, which strips out energy, food, alcohol and tobacco, also picked up to 2.8% from 2.6%. That is a sign the energy shock may be starting to feed through to wider prices, which is exactly what the Bank wants to head off before October's figures land on 18 November.

UK Growth Is Holding Its Own

The economy is also giving the Bank room to tighten.

UK GDP grew 0.7% in the three months to August, up from 0.4% in the second quarter. That compares with 0.4% growth in the eurozone in the third quarter, and a 3.4% annualised pace in the US, equal to roughly 0.8% on the quarter.

Faster UK growth than in the eurozone, along with a central bank set to tighten just a week after the ECB held rates, helps explain why EUR/GBP has slid since late September. Against the dollar, the growth gap is smaller, which puts more weight on the US side of the story.

Dollar Loses Ground After the Midterms

The other half of the move has come from a weaker dollar.

Democrats took control of both the Senate and the House on Tuesday, setting up a divided government for the rest of President Trump's term. Oil prices tumbled and Treasury yields fell in response, while the S&P 500 rallied around 2% on Wednesday.

The Federal Reserve is still expected to raise rates again in December, with CME's FedWatch tool showing around an 81% chance of a hike. That limits how far rate expectations can swing in the pound's favour, and puts Friday's US jobs report firmly on the radar after today's BoE decision.

GBP/USD Technical View: Bouncing From Oversold, Still in the Range

The daily chart shows a strong rebound, but one that is still playing out inside a well-worn range. GBP/USD has been boxed in between ~1.3150 and 1.3650-1.3680 since the spring.

The 14-day RSI fell to around 25 in late September, its most oversold reading of the year, and has since recovered to around 65. That leaves some room before it reaches overbought territory above 70, though the pound already looks stretched against the euro on the same measure.

1.3500 is the first hurdle after capping the pair this week, with the early-September highs near 1.3570 next and the top of the range at 1.3650-1.3680 beyond that. On the downside, the 1.3400 area marks the middle of the range, and a dovish hike could see the pair dip back towards it.

Source: SpreadEx | GBP/USD, Daily Chart