Sterling Holds Steady as Dollar Rally Pauses Ahead of Bank of England Rate Decision

The British pound held steady against the U.S. dollar on Thursday, with the GBP/USD pair trading little changed at 1.3381. The currency's stability comes as a recent surge in the dollar paused, while investors await a pivotal monetary policy announcement from the Bank of England (BoE).

Dollar Rally Stalls After Hawkish Fed

The U.S. dollar experienced a broad rally on Wednesday after the Federal Reserve delivered a 25-basis-point interest rate hike. The move was accompanied by a hawkish "dot plot" forecast, in which 12 of 18 Federal Open Market Committee (FOMC) members projected at least one more rate increase this year.

In his press conference, the Fed Chair described the decision as reducing a "dose of accommodation" and reiterated a commitment to price stability. The market reacted swiftly, with the Dollar Index (DXY) rising 0.6% to a two-month high and two-year U.S. dollar swap rates jumping by 10-12 basis points. According to ING FX strategist Francesco Pesole, risks for the dollar "remain tilted to the upside in the near term."

Bank of England Decision in Focus

Attention now shifts to the Bank of England, which is widely expected to hold its key interest rate at 3.75% later on Thursday. Market consensus points to a 6-3 vote split among policymakers to maintain the current rate, with pricing implying only a minimal 2 basis points of tightening for the meeting.

Ad

Investors will be closely scrutinizing the central bank's forward guidance. The key question, according to Pesole, is "whether Governor Andrew Bailey signals any discomfort with market pricing." Analysts at ING suggest that any dovish tilt from the BoE could weigh on sterling, forecasting the EUR/GBP cross to reach 0.87 by the end of the year.

Broader Market Outlook

Sterling's current price action is being driven primarily by the dollar's movements rather than domestic factors. The outlook for the dollar, and consequently for currencies like the pound and the euro, remains heavily influenced by external factors, particularly oil prices and geopolitical tensions in the Gulf.

ING's baseline forecast sees the dollar stabilizing near its current levels before easing toward the end of the year, but this is contingent on a de-escalation of geopolitical risks. Absent a significant fall in oil prices or a reduction in tensions, both sterling and the euro could face further downside pressure against the dollar.