Sterling strengthened versus the U.S. dollar on Thursday after the Bank of England left its key interest rate unchanged, with gains for the pound accelerating as a broader slide in the dollar followed the Federal Reserve's recent policy meeting.
As of 08:17 ET (12:17 GMT), the GBP/USD pair was quoted at 1.3386, a rise of 0.30% on the day. The euro was marginally higher versus the dollar, with EUR/USD trading at 1.1477, up 0.09%.
BOE decision and commentary
The Bank of England's Monetary Policy Committee voted 6-3 to maintain the benchmark Bank Rate at 3.75%. Three members of the committee preferred a 25 basis-point increase to 4.00% but were outvoted.
Governor Andrew Bailey said inflation had "fallen faster than we’d expected," while cautioning that energy cost pressures stemming from the Middle East conflict could push prices higher later in the year. He added that the MPC's task is to ensure any such pickup proves "temporary." The committee noted that higher borrowing costs and a softer labour market appear to be moderating wage pressures, and judged that current policy settings are "about the right level." The BOE's next policy decision is scheduled for September 17.
Market reaction and external views
ING had anticipated a smaller majority for a hold and expected a 7-2 split. The bank said sterling should "gradually weaken" as market expectations for further UK tightening recede, and highlighted EUR/GBP as targeting a move toward the 0.8600/0.8610 area.
Broader dollar weakness helped lift the pound after markets reacted to the Federal Open Market Committee's meeting earlier in the week, which left investors unsure whether the Fed intends to continue tightening policy. Analysts pointed to moves in U.S. bond markets as an important backdrop to currency flows.
Chris Turner, Global Head of Markets at ING, said the conclusion from the FOMC outcome was that the Fed might not be as aggressive in fighting inflation as previously thought, leaving the impression it could try to navigate the current high inflation environment without additional rate hikes. He noted a 14 basis-point steepening in the 2-30 year Treasury curve and highlighted 30-year mortgage rates moving above 6.70% as signs that bond markets, rather than the Fed, may deliver tightening.
Turner warned that a further sell-off in the long end of the curve could prompt "bond vigilantes" to exert pressure that might force the Fed to defend the short end of the yield curve with higher short-term rates.
Data calendar and risks for the dollar
Traders are now focused on core PCE inflation data for June, due later on Thursday, where the year-on-year rate is expected to slow to 3.3% from 3.4%. Investors will also see a first estimate of U.S. second-quarter GDP, forecast at a 2.0% annualized pace. Any downside surprise in those prints could add to dollar weakness, according to market commentary.
Eurozone growth and inflation dynamics
The euro's modest recovery was driven more by dollar crosscurrents than by domestic strength, although the economic data were firmer than expected. Eurostat reported that eurozone GDP expanded 0.4% quarter-on-quarter in the second quarter, beating a 0.2% forecast and improving on flat growth in the first quarter.
At the country level, Germany's GDP slowed to 0.2% growth, France returned to modest expansion at 0.2%, and Spain accelerated to 0.7% quarter-on-quarter. A temporary framework U.S.-Iran ceasefire earlier in the quarter had briefly eased oil prices toward pre-war levels and supported activity late in the quarter, but renewed fighting has since pushed Brent above $92 a barrel, reviving concerns about inflationary pressure.
With eurozone inflation still above the European Central Bank's 2% target, market pricing now puts a second ECB rate hike this year in September or October at better than a 90% probability, according to ING. The bank expects EUR/USD to trade in a 1.14-1.15 range in the near term and has a house target near 1.17 by quarter-end, a projection Chris Turner described as "a very close call" given elevated energy costs and a resilient U.S. economy.
Implications across markets
- FX markets are reacting to central bank signals and bond market moves, with the pound benefiting from the BOE pause and dollar softness following the Fed meeting.
- Bond and mortgage markets are feeding into policy expectations; higher long-term yields and mortgage rates above 6.70% could influence borrowing costs in housing and corporate debt markets.
- Energy price volatility, with Brent trading above $92 a barrel after renewed fighting, remains a key inflation risk that could affect central bank decisions and near-term market pricing.