Pound Sterling Strengthens as Bank of England Holds Rates in Split Decision

The British pound rose against a broadly weaker U.S. dollar on Thursday after the Bank of England (BOE) held its benchmark interest rate steady, as widely expected, but a divided vote revealed underlying pressure for further tightening.

At 8:17 AM ET, the GBP/USD pair traded at 1.3386, up 0.30% on the day, accelerating its gains following the central bank's announcement.

Bank of England's Divided Decision

The BOE's Monetary Policy Committee (MPC) voted 6-to-3 to maintain the key bank rate at 3.75%. The three dissenting members favored an immediate 25-basis-point increase to 4.00%, a more hawkish split than some analysts had anticipated. ING, for example, had forecast a 7-to-2 vote.

In a statement, BOE Governor Andrew Bailey acknowledged that inflation, which recently fell to a better-than-expected 2.6%, was declining "more than anticipated." However, he warned that rising energy costs due to conflict in the Middle East could fuel another price surge later this year. The MPC's task, he said, is to ensure any rebound is "temporary." The bank's next policy decision is scheduled for September 17.

Market Context and Outlook

The pound's strength was also supported by persistent weakness in the U.S. dollar. Uncertainty lingers over the Federal Reserve's next move after its policy meeting on Tuesday. According to Chris Turner, Global Head of Markets at ING, investors have concluded the Fed "will not be as aggressive as first thought" in its inflation fight.

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Traders are now focused on key U.S. economic data due Thursday, including:

• June Core PCE inflation: Expected to slow to 3.3% year-over-year from 3.4%.
• Second-quarter GDP: The initial estimate is forecast to show 2.0% annualized growth.

A downside surprise in these figures could add further pressure on the dollar, as it would reinforce expectations that the Fed will hold off on further tightening at its September 16 meeting, Turner noted.

Euro Gains on Dollar Weakness

The euro also edged higher, with the EUR/USD pair up 0.09% to 1.1477. The move was attributed more to the dollar's decline than to specific strength in the Eurozone, despite better-than-expected economic data. Eurostat reported that the bloc's second-quarter GDP grew by 0.4%, doubling analyst expectations and improving from zero growth in the first quarter.

However, renewed inflation risks from oil prices, with Brent crude back above $92 a barrel, have markets pricing in a greater than 90% chance of another rate hike from the European Central Bank (ECB) in September or October, according to ING.