GBP/USD rises as Democrats win midterms and ahead of BoE rate decision

GBP/USD is rising above 1.3475 to a six-week high after the Democrats won complete control of Congress in the U.S. midterm elections, pulling the U.S. dollar lower ahead of the Bank of England rate decision.

A blue sweep pulls USD lower

A sweeping Democratic victory in the midterm elections sees the Democrats take control of both the House and the Senate. Treasury yields are falling on expectations that the Democrats will limit government spending, pulling the U.S. dollar lower, at least for now.

However, there is a risk that with limited domestic control, Trump could turn his full attention to foreign policy. An escalation of hostilities in the Middle East and against Iran could lift oil prices further, boosting inflationary pressures, Treasury yields and the U.S. dollar.

In addition to the midterm results, attention will turn to the nonfarm payroll report on Friday. The data comes as the market prices in a 79% chance of a December rate hike. A strong NFP reading could cement these expectations and help the U.S. dollar recover.

BoE rate decision

The Bank of England will announce its interest rate decision on Thursday at 12:00 midday GMT.

Expectations are that the BoE will hike rates by 25 basis points to 4%, marking the first rate hike since August 2023.

The meeting comes as UK inflation has risen to 3.5%, as oil and energy prices continue to rise because of the Iran war. Core inflation also rose to 2.8% year-on-year in September, up from 2.6% in August.

Meanwhile, services inflation, a gauge the Bank of England monitors closely because it reveals domestic price pressures, rose to 3.7%, up from 3.4% in August. This, combined with signs of a stabilising labour market, as unemployment fell, has reinforced and cemented expectations of a November hike.

Given the move is 97% priced in, attention will be on the meeting minutes, Bank Governor Andrew Bailey's press conference, and updated growth and inflation forecasts.

Official forecasts from the Office for Budget Responsibility for 2027 growth have been downgraded from 1.6% to 1%.

Meanwhile, expectations are that the cost of energy will drive inflation higher in 2027 as businesses across the economy, from food manufacturers to airlines, adjust their prices higher.

However, markets are pricing in a further three rate hikes at the Bank of England's February, March and April meetings in 2027, which appears somewhat aggressive. This would take Bank Rate to between 4.75% and 5%.

While the Bank of England is not expected to guide on how many hikes it is planning, there is a possibility that the meeting minutes, or even Governor Bailey himself, could signal that the terminal rate is unlikely to reach the level currently priced in by markets.

Should the Bank of England push back against aggressive rate hike expectations, that could result in a dovish hike and weigh on GBP. However, should the central bank upwardly revise its inflation forecasts, this could be considered a hawkish hike and lift GBP/USD higher.

GBP/USD technical analysis

GBP/USD has recovered from the 1.32 support zone, pushing above its falling trend line, the 50 EMA and the 200 EMA, maintaining a constructive picture and moving towards 1.35.

Bulls, supported by the RSI above 50, will look to extend gains above the 1.35 resistance zone before turning attention to 1.36 and 1.3650, around the August high.

On the downside, the moving averages offer support, with the 200 EMA at 1.34 and the 50 EMA at 1.3360. A move below here opens the door to the 1.33 support zone and the October 27 swing low. From there, attention turns to 1.32.