- The Bank of England will announce its decision on monetary policy on Thursday.
- The BoE is likely to keep the benchmark rate unchanged for a second consecutive meeting at 5.25%.
- The United States Federal Reserve left rates unchanged at 5.5%, offering relief to markets.
- Pound Sterling trades in a well-limited range against the US Dollar.
The Bank of England’s (BoE) Monetary Policy Committee (MPC) is meeting this week to decide the future of monetary policy and will announce its decision on Thursday, November 2. The central bank will publish the Monetary Policy Report alongside it, which offers the economic analysis and inflation projections that the MPC uses to make its interest rate decisions.
The BoE is expected to stand pat again after September’s meeting, when policymakers decided to keep the base rate on hold at 5.25% in a tight 5-4 vote. This is the highest level since 2008, and financial markets are still pricing a terminal rate of 5.5% by the start of 2024. Ahead of the event, the Pound Sterling trades near a multi-month low of 1.2037 against the US Dollar after a massive drop from July’s peak at 1.3141.
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Bank of England interest rate decision: What to know in markets on Thursday
- GBP/USD is sitting at weekly highs as market players assess the Federal Reserve (Fed) monetary policy announcement.
- The BoE is watching three specific data figures on which it bases its policy decisions: private-sector wage growth, services inflation and the vacancy-to-unemployment ratio.
- Like most major central banks, the BoE also adopted the “higher for longer” stance based on keeping benchmark rates elevated for an extended period to tame inflationary pressures.
- Ahead of the announcement, the United Kingdom (UK) shop price inflation eased to 5.2% in October, its lowest rate in more than a year, helped by falling prices of homegrown food, according to the British Retail Consortium.
- The Consumer Prices Index (CPI) rose by 6.7% in the 12 months to September, the same rate as in August. On a monthly basis, CPI rose by 0.5% in September 2023, the same rate as in September 2022.
- Meanwhile, the world faces a new uncertainty factor from the Middle East. On October 7, the Palestinian group, Hamas, attacked Israel, leading the latter to declare war. The ground invasion of the Gaza Strip began over the weekend, with market participants keeping an eye on the situation.
- As widely anticipated, the Fed maintained rates at 5.5%. The announcement had a limited impact on financial markets, as the central bank offered a mixed message. Powell offered some hawkish lines, saying they are not considering rate cuts but questioning whether additional hikes are needed. He also noted policymakers are committed to achieving a sufficiently restrictive stance, but they can’t say at the moment if they have reached that point.
- Early on Wednesday, the US Treasury announced upcoming auction sizes of $112 billion, slightly below the $114 billion anticipated by financial markets. The Treasury also announced plans to increase auction sizes one more time. The predictability of the announcement brought relief to the markets, while the Fed’s announcement fell short of spurring fresh concerns.
When will the BoE release its monetary policy decision and how could it affect GBP/USD?
The BoE is expected to keep the main rate on hold at 5.25% on Thursday, November 2. The decision will be announced at 12:00 GMT, alongside the release of the Minutes of the meeting and the Monetary Policy Report. Governor Andrew Bailey will then hold a press conference in which he will explain the background of policymakers’ decisions.
BoE Governor Andrew Bailey and his colleagues have little room to manoeuvre. The British economy is giving more and more signs of weakening, and the traces of recession returned even after the MPC expressed easing concerns on the matter.
Nevertheless, taming inflation is the central bank’s main goal at the time being, while wage growth remains high. Average earnings in the three months through August surged 7.8% from a year earlier, according to the Office for National Statistics, moderating slightly, but still rising too quickly to be compatible with the central bank’s 2% inflation target.
Despite the disappointing August inflation figures, it seems unlikely that the MPC will hike rates this time. Data in between meetings has not brought significant change factors to the table, so policymakers will likely remain on hold. However, the odds of one more rate hike in the upcoming months are quite high. Market participants still believe the central bank will maintain a mostly hawkish stance, as a 6.7% annual CPI does not align with a neutral stance.
Governor Bailey will likely note that the effects of previous rate hikes are yet to take effect on the economy to justify the on-hold decision.
With the BoE foreseen adding little changes to the monetary policy, the chances of a sharp directional move are limited. Still, a hawkish surprise seems more likely than a dovish one. With the Greenback on the back foot, the pair can turn north with the first-tier event.
GBP/USD is challenging the weekly high near 1.2200, moving further away from the October monthly low of 1.2037. According to Valeria Bednarik, FXStreet.com’s Chief Analyst, “GBP/USD has a long way to go before turning bullish. Despite the lack of US Dollar momentum, the pair would need to run past the October 24 peak at 1.2288 to convince buyers.”
Bednarik adds: “Technically, the risk skews to the downside according to the daily chart. A flat 20 Simple Moving Average (SMA) at around 1.2180 has been scaled, while the longer moving averages are directionless, although over 300 pips above the current level. The same chart shows that the Momentum indicator advances within negative levels, while the Relative Strength Index (RSI) indicator stands pat at around 44. The pair has been steadily meeting buyers on slides below the 1.2100 mark, a near-term support level. Once below 1.2069, however, sellers may seize control of GBP/USD.”
Pound Sterling price today
The table below shows the percentage change of Pound Sterling (GBP) against listed major currencies today. Pound Sterling was the weakest against the Swiss Franc.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -0.16% | -0.11% | -0.05% | -0.18% | -0.17% | -0.21% | -0.35% | |
| EUR | 0.14% | 0.03% | 0.10% | -0.04% | -0.03% | -0.07% | -0.20% | |
| GBP | 0.12% | -0.03% | 0.06% | -0.07% | -0.06% | -0.10% | -0.24% | |
| CAD | 0.05% | -0.11% | -0.06% | -0.13% | -0.12% | -0.17% | -0.30% | |
| AUD | 0.18% | 0.05% | 0.09% | 0.15% | 0.03% | -0.03% | -0.14% | |
| JPY | 0.16% | 0.04% | 0.07% | 0.10% | -0.02% | -0.07% | -0.18% | |
| NZD | 0.24% | 0.06% | 0.10% | 0.17% | 0.03% | 0.04% | -0.15% | |
| CHF | 0.35% | 0.21% | 0.24% | 0.30% | 0.14% | 0.18% | 0.11% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
UK gilt yields FAQs
UK Gilt Yields measure the annual return an investor can expect from holding UK government bonds, or Gilts. Like other bonds, Gilts pay interest to holders at regular intervals, the ‘coupon’, followed by the full value of the bond at maturity. The coupon is fixed but the Yield varies as it takes into account changes in the bond’s price. For example, a Gilt worth 100 Pounds Sterling might have a coupon of 5.0%. If the Gilt’s price were to fall to 98 Pounds, the coupon would still be 5.0%, but the Gilt Yield would rise to 5.102% to reflect the decline in price.
Many factors influence Gilt yields, but the main ones are interest rates, the strength of the British economy, the liquidity of the bond market and the value of the Pound Sterling. Rising inflation will generally weaken Gilt prices and lead to higher Gilt yields because Gilts are long-term investments susceptible to inflation, which erodes their value. Higher interest rates impact existing Gilt yields because newly-issued Gilts will carry a higher, more attractive coupon. Liquidity can be a risk when there is a lack of buyers or sellers due to panic or preference for riskier assets.
Probably the most important factor influencing the level of Gilt yields is interest rates. These are set by the Bank of England (BoE) to ensure price stability. Higher interest rates will raise yields and lower the price of Gilts because new Gilts issued will bear a higher, more attractive coupon, reducing demand for older Gilts, which will see a corresponding decline in price.
Inflation is a key factor affecting Gilt yields as it impacts the value of the principal received by the holder at the end of the term, as well as the relative value of the repayments. Higher inflation deteriorates the value of Gilts over time, reflected in a higher yield (lower price). The opposite is true of lower inflation. In rare cases of deflation, a Gilt may rise in price – represented by a negative yield.
Foreign holders of Gilts are exposed to exchange-rate risk since Gilts are denominated in Pound Sterling. If the currency strengthens investors will realize a higher return and vice versa if it weakens. In addition, Gilt yields are highly correlated to the Pound Sterling. This is because yields are a reflection of interest rates and interest rate expectations, a key driver of Pound Sterling. Higher interest rates, raise the coupon on newly-issued Gilts, attracting more global investors. Since they are priced in Pounds, this increases demand for Pound Sterling.
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