GBP Corrects After BoE's Hawkish Signal, US Dollar Regains Strength
GBP/USD weakened on Friday and traded around 1.3380, down 0.39% after a strong rally the previous day following the Bank of England's (BoE) decision. The correction occurred as the US dollar strengthened again, amid global markets still pricing in tighter monetary policy for longer due to inflationary pressures, particularly from energy.
The BoE held interest rates at 3.75% as expected, but surprised the market with a unanimous 9-0 vote to maintain rates, compared to expectations of 7-2. This shift was significant because it contrasted with the previous narrow 5-4 decision. BoE Governor Andrew Bailey emphasized that the central bank is ready to act if inflation proves more persistent, reinforcing a more hawkish tone.
The Monetary Policy Committee (MPC) also sharply revised its third-quarter inflation projection to around 3.5% from 2%, primarily driven by rising energy prices related to the war in the Middle East. Several members have become increasingly hawkish, including Catherine Mann, who has opened the door to a longer interest rate hold or even a hike, while the typically dovish Swati Dhingra has acknowledged that interest rates may need to rise.
In the US, the Federal Reserve is holding interest rates at 3.50%–3.75% and still projects one cut this year. However, Fed Chair Jerome Powell has highlighted growing uncertainty regarding the Iran conflict, and the dot plot shows more officials no longer anticipating a cut this year—supporting the dollar.
The dollar index (DXY) bounced towards 99.50 on Friday after briefly touching around 99.00 on Thursday. The rally is supported by expectations of "higher for longer," with a 71.8% chance of rates being held until the end of the year according to CME FedWatch, limiting GBP/USD's upside despite the Bank of England's fundamental support for the pound.
MUFG believes the repricing of UK interest rate expectations is pushing yields up and supporting the GBP, but warns that this move could be excessive and vulnerable if risk sentiment worsens, particularly if Middle East tensions escalate. ING also believes the repricing towards more aggressive BoE tightening is likely overdone, emphasizing that oil price dynamics remain a key driver of GBP/USD as energy influences both inflation and global risk appetite.
Source: Newsmaker.id
