Pound Sterling soars as BoE remains concerned about sticky inflation

• Pound Sterling recovers further on steady monetary policy by the BoE.
• The BoE was expected to keep interest rates steady due to a weakening economy and falling inflation.
• Three BoE policymakers supported raising interest rates further.

The Pound Sterling (GBP) has extended its rally above 1.2700 against the US Dollar after the Bank of England (BoE) maintained interest rates steady at 5.25% in the finale of 2023. This was the third straight time when the BoE maintained the status quo through a 6-3 majority as anticipated. BoE policymakers: Megan Greene, Jonathan Haskel, and Katherine Mann endorsed raising interest rates one more time by 25 basis points (bps).

BoE Governor Andrew Bailey kept doors open for further policy-tightening and remained stuck to the 'higher for longer interest rates' narrative. Bailey warned that measures of inflation persistence are higher in the UK economy than in other major advanced economies.

Meanwhile, the shrinking UK economy has put UK Prime Minister Rishi Sunak’s promise of ramping growth in jeopardy as the economy is struggling to absorb the consequences of higher interest rates. This could dampen the outlook of GBP/USD ahead.

Daily Digest Market Movers: Pound Sterling rallies as BoE worries about sticky inflation

• Pound Sterling climbs to near 1.2700 as the BoE has kept interest rates unchanged at 5.25% as anticipated by the market participants.
• The BoE held interest rates unchanged at 5.25% for the third consecutive time but warned that further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.
• Out of the nine-member MPC-led committee, policymakers: Megan Greene, Jonathan Haskel, and Katherine Mann supported raising interest rates by quarter-to-a-percent to 5.50%. 
• Easing price pressures, falling pay growth, and a shrinking economy seem supportive factors for maintaining a status quo by the BoE.
• In the three months to October, earnings excluding bonuses grew at a slower pace of 7.3% against expectations of 7.4% and the former reading of 7.8%. Wage growth is slowing but it is still high. 
• UK’s headline inflation has sharply declined to 4.6% in October. 
• Monthly Gross Domestic Product (GDP) contracted 0.3% in October, more than the 0.1% forecasted by markets.  This is the first contraction since July. The Office for National Statistics (ONS) attributed exceptionally wet weather to the decline in GDP. 
• A significant fall in Manufacturing and Industrial Production has raised concerns of a potential recession in the UK economy.
• With a sharp decline in the UK’s economic activity, BoE policymakers are expected to follow the footprints of the Fed and will discuss cutting interest rates in 2024.
• UK Chancellor Jeremy Hunt said that a sharp impact of higher interest rates on the economy was inevitable. 
• The market mood favors risk-perceived assets as Jerome Powell remained surprisingly dovish while guiding further monetary policy action on Wednesday.
• The Fed lowered their core Personal Consumption Expenditure (PCE) projections for 2024 and 2025 and hinted at three rate cuts in 2024. 
• A “soft landing” scenario from the Fed is highly anticipated, which indicates that the economy has managed to tame inflation without any economic collapse and higher jobless rates.

Technical Analysis: Pound Sterling aims stabilization above 1.2700

Pound Sterling jumps above 1.2700 as the BoE has kept the interest rates unchanged at 5.25% as expected. The GBP/USD pair trades near a nine-day high of around 1.2650 after a sharp recovery from the psychological support of 1.2500.

On a broader note, more strength in the Pound Sterling would allow the GBP/USD pair to re-test November’s high around 1.2733, which coincides with the 61.8% Fibonacci retracement. The 20-day Exponential Moving Average (EMA) at 1.2557 is expected to continue to provide support to the Pound Sterling bulls.