Pound Sterling holds gains as BoE stands pat for second straight meeting

• Pound Sterling generates significant gains as BoE holds interest rates steady at 5.25%.
• The BoE inflation forecast shows that UK Sunak would fulfill his promise of bringing down inflation to 5.4%
• UK business optimism dipped to a ten-month low as firms cut heavily on personnel and inventory in October.

The Pound Sterling (GBP) advances strongly as the Bank of England (BoE) has kept interest rates unchanged at 5.25%, as expected. BoE policymakers: Jonathan Haskel, Megan Greene, and Katherine Mann voted for a 25 basis points (bps) rate hike while the other six policymakers including new Deputy Governor Sarah Breeden, who has replaced Jon Cunliffe, advocated for keeping interest rates unchanged.  Dovish policymaker Swati Dhingra supported an unchanged interest rate decision but was expected to advocate a rate cut.

The inflation forecast report by the BoE shows that consumer inflation will soften to 4.6% by the Q4 of 2023. This indicates that UK Prime Minister Rishi Sunak would manage to fulfill his promise of halving inflation to 5.4% by the year-end. Inflation in one and two-year timeframe is seen declining to 3.1% and 1.9% respectively. The Unemployment Rate is seen at 4.3% and wage growth at 6.75% annually by the year-end. 

BoE Governor Andrew Bailey, in his monetary policy statement. said that the central bank is watching closely if further policy-tightening is required. He further added that the policy is likely to remain restrictive for an extended period. 

The GBP/USD pair has been performing stronger since Wednesday as market sentiment improved after the Federal Reserve (Fed) kept interest rates steady in the range of 5.25%-5.50%. The Pound Sterling outlook is still downbeat as the UK economy is struggling for a firm footing due to weak retail demand, poor business data, a vulnerable housing sector, and a deteriorating labor market. It seems that these factors leaned BoE policymakers towards keeping interest rates unchanged as more rate hikes could further dampen the economic outlook and push the economy into a recession. 

Meanwhile, deepening Middle East tensions pose more threats to the progress in taming inflation toward 2% as the possibility of tightened Oil supply could propel energy prices again. 

Daily Digest Market Movers: Pound Sterling remains upbeat on risk-on mood

• Pound Sterling refreshes weekly high amid steady BoE policy and improved market mood on expectations that the Federal Reserve is done hiking interest rates.
• The BoE has held interest rates steady at 5.25% for the second time in a row.
• An unchanged interest rate decision from the BoE was widely anticipated despite upside risks to inflation.
• The headline and core inflation in the UK economy are at 6.7% and 6.1%, respectively, partly fueled by strong wage growth.
• The upside risks to consumer inflation have escalated due to deepening Middle East tensions, which could propel energy prices.
• There is increasing speculation that the central bank could raise the inflation target to 3%.
• Andrew Bailey, in his remarks, remained confident that price pressures will remarkably decline in October and denied any plans of raising the inflation target.
• On the economic data front, S&P Global reported on Wednesday that Manufacturing PMI dropped to 44.8 in October against expectations and the preliminary reading of 45.2.
• S&P Global reported that "Risks to the outlook remain skewed to the downside. Business optimism dipped to a ten-month low and manufacturers' increased belt-tightening drove cuts to employment, purchasing, and inventories.”
• Meanwhile, the US Dollar falls sharply on increasing odds that the Fed is done hiking interest rates. In addition to a stable Fed policy, weak ADP private payrolls and downbeat ISM Manufacturing PMI data have also weighed heavily on the US Dollar.
• The US ADP reported that employers hired 113K job seekers, lower than expectations of 150K but significantly higher than the former reading of 89K. The ISM reported the Manufacturing PMI at 46.7, lower than expectations and the former reading of 49.0.
• Going forward, the US Dollar will dance to the tunes of the Nonfarm Payrolls (NFP) data, which will be published on Friday.

Technical Analysis: Pound Sterling aims stabilization above 1.2200

Pound Sterling climbs above the round-level resistance of 1.2200. The GBP/USD jumps above the 20-day Exponential Moving Average (EMA), which trades around 1.2185 after the BoE maintains the status quo. The Cable, which strengthened sharply after Wednesday’s Fed decision, falls slightly in the European morning but remains above 1.2100 ahead of the BoE monetary policy decision. The pair’s broader outlook remains vulnerable amid downward-sloping 50-day and 200-day Exponential Moving Averages (EMAs).