The Bank of England executed its inaugural rate hike in over three years on Thursday, 5 November, yet the response in sterling was minimal. GBP/USD traded at 1.3465 in the U.S. session, remaining essentially unchanged on the day, following an 8-1 vote that resulted in a quarter-point increase in the Bank Rate to 4%. The pair traded within the Asian session around 1.3485, exhibiting an overnight range from 1.3408 to 1.3484, prior to a gradual decline leading into the noon London decision. In the immediate aftermath of the Monetary Policy Report, the pound experienced a modest recovery from its session lows, stabilising around 1.3470. By the afternoon, it was valued at 1.3461. The subdued reaction indicates that the adjustment was entirely anticipated. Markets indicated a probability exceeding 99% for a rate hike prior to the announcement, while swap curves had incorporated 100 basis points of tightening within the next year as early as October 20. A quarter-point hike, achieved through an 8-1 vote, represented the precise consensus outcome. The detail surrounding the recent developments is noteworthy: the Bank has raised its inflation peak forecast to 4.9% for the second quarter of 2027. Additionally, Governor Andrew Bailey indicated that Thursday’s increase may not be the final adjustment unless the conflict in the Middle East is addressed. The broader context indicates a pound in recovery. GBP/USD reached its lowest point for 2026 at 1.3137 on October 14. It has since increased by 2.5% and achieved a six-session rally leading up to Thursday’s decision. On October 20, the pair surpassed 1.3400 for the first time since mid-September, driven by UK jobs data. It has now surpassed its 200-day moving average and is trading above its 100-day simple moving average. At 1.3465, it occupies a central position within its wider range, which spans from 1.3372 to 1.3591.
The thesis for this forecast is clear-cut. The Bank of England has positioned sterling as the higher-yielding component of the cable trade for the first time in this cycle. The Bank Rate currently stands at 4%, aligning with the upper limit of the Federal Reserve’s range of 3.75% to 4.00%. Meanwhile, the yield on the two-year gilt is at 4.78%, compared to 4.50% for the two-year Treasury. The 28-basis-point gap provides an advantage to the pound. However, the increase is reflected in the price, as the dollar stabilised on Thursday following a 57-year low in U.S. jobless claims and remarks from three hawkish Fed speakers. The Bank based its forecasts on an oil price of $108, which has since decreased to $97. Sterling possesses carry advantages, with a resistance level established between 1.3503 and 1.3535. Friday’s U.S. payrolls report will determine which entity emerges victorious first. The pound’s recovery commenced following a significant washout. GBP/USD fell to 1.3137 on October 14, its lowest level of 2026, as the Fed’s September rate hike and elevated U.S. inflation strengthened the dollar across the board. At that juncture, the pair was probing the lower boundary of its annual range, and sentiment regarding sterling was unfavourable. Institutional forecasters were revising their cable projections downward, with several adopting a more favourable outlook on the pound relative to the euro compared to the dollar. The shift originated from data released in the UK. On October 20, the labour market report indicated a decline in unemployment to 4.7%, while private-sector regular pay growth aligned with both consensus expectations and the Bank’s third-quarter forecast at 3.0% year over year, an increase from 2.9% in July. Monetary Policy Committee member Megan Greene, who had voted for a hike in September, said pay growth had stopped slowing and that the Bank should act early against higher prices feeding into wages. GBP/USD rose from 1.3300 to just above 1.3400 that day, a five-week high.
The inflation print followed. On October 21, UK CPI rose to 3.5% in September from 3.1% in August, above the 3.4% consensus. Core inflation climbed to 2.8% from 2.6%, and services inflation to 3.7% from 3.4%. That locked in expectations for a November hike, pushing the probability to 95% and then above 99%. The October 28 UK Budget and Fed decision proceeded without hindering the recovery. The Fed maintained rates at 3.75% to 4.00%, with two members dissenting in favour of an increase. This decision has kept the dollar supported, though it has not propelled it to higher levels. The pound responded positively to the fiscal news and continued its upward trajectory. This week included the U.S. election. Democrats swept both chambers of Congress on Tuesday, and the dollar fell to a five-week low on Wednesday as markets priced less fiscal expansion under divided government. GBP/USD extended its rally, cleared the 200-day moving average and reached 1.3485 in Thursday’s Asian session. Short covering contributed to the momentum as the technical landscape showed signs of enhancement. Then arrived Thursday. The dollar stabilized after U.S. jobless claims fell to 189,000, and the Bank of England delivered exactly what was expected. Sterling’s six-session rally has encountered a pause just beneath 1.3503, a threshold where a potential double top on the hourly chart now poses a risk to the upward movement.
The Monetary Policy Committee convened and reached a decision with an 8-1 vote at its meeting concluding on November 4, resulting in an increase of the Bank Rate by 0.25 percentage points to 4%. It marked the Bank’s inaugural rate hike since August 3, 2023, when it peaked at 5.25% amid the previous inflationary period. Bank Rate had remained at 3.75% since December 2025. The sole dissenter was external member Catherine Mann, who cast her vote in favour of a half-point increase to 4.25%. The dissent holds greater significance than the vote itself. A split where the minority advocates for a more substantial shift indicates a committee inclined toward a hawkish stance. Mann contended that, considering risk management and credibility, a 50-basis-point increase would constitute sound policy. That represents a significant change from September, when the committee maintained a rate of 3.75% in a 6-3 vote, with Mann, Chief Economist Huw Pill, and Megan Greene already expressing support for an increase. In a span of two months, the Monetary Policy Committee transitioned from a 6-3 decision to maintain the current stance to a unanimous 9-0 vote in favour of tightening, with one member advocating for a more aggressive approach. The Bank’s rationale was primarily focused on energy. The Monetary Policy Summary indicated that energy prices have remained elevated and unstable as a result of the ongoing conflict in the Middle East, which has now persisted for nine months. The committee increased rates to mitigate the impact of escalating energy costs on broader price levels. While energy costs persist in influencing firm and household bills, the Bank noted that there is still limited evidence of spillover effects on other prices and wages at this stage.
However, the extent of inflationary pressure currently present in the pipeline is adequate to justify an increase. Activity data has been incorporated into the case. The Bank indicated that recent activity has generally exceeded expectations, and aggregate credit volumes continue to be more robust than anticipated. GDP growth has exceeded expectations. That provided the committee with the opportunity to implement tighter measures without the immediate concern of a recession. The Bank also emphasised that monetary policy is not on a predetermined trajectory. That standard language allows for a moment of reflection should circumstances evolve. However, the committee clearly articulated its strategy to ensure that the economic adjustment to elevated energy prices sustainably meets the 2% inflation target. The minutes indicated that while monetary policy is unable to affect global energy prices, it does have the capacity to mitigate second-round effects. For GBP/USD, the decision itself was neutral as it was entirely priced in. The hawkish signals surrounding it, including Mann’s dissent and the upgraded forecasts, provided sterling support that prevented the pair from declining further as the dollar strengthened.
