Pound rises after Fed cut, BOE expected to hold

The British pound has extended its gains on Thursday. In the European session, GBP/USD is trading at 1.3282, up 0.53% on the day. The pound has been on a tear against the US dollar and hit a 2.5-year high on Wednesday, climbing to 1.3297.

Bank of England expected to hold rates

The Bank of England meets later today and is widely expected to maintain the cash rate at 5%. The BoE joined the rate-cutters club in August with a 25-bps cut, the first time it lowered rates since 2020. Inflation has finally dropped to the BoE’s 2% target but the Bank is expected to remain cautious on rate policy. The markets are looking at another rate cut before year’s end and will be sniffing for clues about future rate policy from the rate statement and Governor Bailey’s press conference.

There are upside risks to UK inflation and these were reflected in the August inflation report on Wednesday. Headline inflation was unchanged at 2.2% but core inflation rose from 3.3% to 3.6%. Services inflation, which the BoE closely watches, rose from 5.2% to 5.6%. In addition, wage growth has eased but remains high and is contributing to inflationary pressures.

Fed delivers oversize cut

The Federal Reserve put its stamp on one of the most dramatic rate meetings in years on Wednesday. The Fed was virtually guaranteed to deliver a rate cut of at least 25 basis points but there was a strong likelihood of a jumbo 50-bps cut and the suspense lasted right up to the wire. In the end, 11 of the 12 FOMC members were on board for the deeper cut, likely over concern about the deteriorating US labor market.

The US dollar has responded with losses against most of the major currencies, and the Australian dollar has surged 1.07% today, as risk appetite has jumped.

GBP/USD Technical

GBP/USD has pushed above resistance at 1.3221 and is putting pressure on resistance at 1.3290
1.3145 and 1.3076 are providing support

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