Pound surrenders BoE rate-hike gains ahead of Friday's US payrolls

1.3500 has halted the GBP/USD rally. The pair is heading for its first decline in seven sessions.
Despite all nine members backing a hike, BoE Governor Bailey cautioned against expecting a series of increases.
65K is the forecast for October payrolls due on Friday, compared with September's 29K.

4% is the UK's new Bank Rate. The Bank of England (BoE) delivered the fully priced-in increase on Thursday, while Sterling's six-session advance stalled just above 1.3500. GBP/USD first touched that level on Wednesday, marking its highest since mid-September, and revisited it on Thursday. Now trading around 1.3450, the pair is set for its first decline in seven sessions.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

The vote to raise rates was unanimous among the nine members, with one favouring a half-point increase. However, BoE Governor Bailey cautioned that the move should not be interpreted as the start of a series. From 3.5% in September, inflation is projected by the BoE to approach 5% by mid-2027. Market pricing puts the probability of a December hike at almost one in two, up from one in three before the decision. A further three-quarters of a point is priced in by the end of 2027.

After falling to a one-month low on Wednesday following the Democrats' capture of both houses of Congress, the Dollar has regained some ground. Jobless claims declined to 189K, below the 196K forecast. Third-quarter unit labour costs dropped 0.7%, rather than increasing 0.6% as expected. The market-implied probability of a December Fed hike has eased to around 70% from above 80% on Wednesday. At 4%, the Bank Rate is now level with the upper end of the Fed's 3.75%-4.00% range.

65K Payrolls Forecast Leads the Data Calendar

Friday's October Nonfarm Payrolls (NFP) release is scheduled for 13:30 GMT, with 65K expected against September's 29K. Also on Friday, New York Fed President Williams is due to speak at 09:30 GMT, followed by Fed Governor Bowman at 17:15 GMT. The next release is October's Consumer Price Index (CPI), due at 13:30 GMT on Tuesday, 10 November. A 0.3% increase is forecast, following 0.6%. These releases and remarks will all inform the Fed's 8-9 December meeting.

The BoE speaking schedule starts with Governor Bailey at 17:25 GMT on Monday. Deputy Governor Lombardelli follows at 12:30 GMT on Tuesday, with Chief Economist Pill speaking at 18:30 GMT. Due at 07:00 GMT on Thursday, 12 November, third-quarter Gross Domestic Product (GDP) follows growth of 0.5% and will inform the BoE's December meeting.

1.3250 October Low Anchors the Chart Retracement

About a quarter of the advance from the 28 October low, just above 1.3250, has been retraced in the retreat from the high. Thursday's trading bar remains within Wednesday's range. GBP/USD continues to trade above its 50-day Exponential Moving Average (EMA), just above 1.3350, and its 200-day EMA, just below 1.3400. The 50-day EMA nevertheless remains beneath the 200-day. Daily momentum has begun to weaken from overbought levels.

Daily GBP/USD Price Chart

Pound Sterling: Key Questions Answered

What defines the Pound Sterling?

Dating back to 886 AD, the Pound Sterling (GBP) is the world's oldest currency and serves as the United Kingdom's official currency. According to 2022 data, it ranks fourth globally by foreign exchange (FX) trading activity, representing 12% of all transactions and an average daily value of $630 billion. Among its main trading pairs, GBP/USD, known as ‘Cable’, accounts for 11% of FX activity. GBP/JPY, which traders call the ‘Dragon’, represents 3%, while EUR/GBP accounts for 2%. Responsibility for issuing the Pound Sterling rests with the Bank of England (BoE).

Why do Bank of England decisions affect Sterling?

Monetary policy set by the Bank of England has the greatest influence on the Pound Sterling's value. Policy decisions depend on progress towards the BoE's main objective of “price stability”, meaning a steady inflation rate of around 2%. Interest-rate adjustments are its principal means of meeting that objective. To curb excessive inflation, the BoE seeks to raise borrowing costs through higher interest rates, making credit more expensive for households and businesses. GBP generally benefits because higher rates increase the UK's appeal to international investors seeking a place for their funds. Inflation that falls too low, by contrast, signals slowing economic growth. The BoE would then consider cutting rates to reduce credit costs, encouraging businesses to borrow more and invest in projects that generate growth.

Which economic releases move the Pound?

By indicating the economy's health, economic releases can shift the Pound Sterling's value. GDP, Manufacturing and Services PMIs, and employment figures are among the indicators that can shape GBP's direction. Sterling benefits from economic strength through greater foreign investment. A strong economy may also prompt the BoE to raise interest rates, directly strengthening GBP. Conversely, weak economic figures are likely to weigh on the Pound Sterling.

Why does the Trade Balance matter for Sterling?

The Trade Balance is another important release for Sterling, showing the difference between a country's export earnings and import spending over a specified period. Strong overseas demand for a country's exports creates additional demand for its currency as foreign buyers seek to purchase those goods. A positive net Trade Balance therefore supports the currency, while a negative balance has the opposite effect.