GBP/USD: Pound rallies as BoE leaves rates unchanged

The British pound rose sharply against the U.S. dollar on Thursday after the Bank of England voted to leave interest rates unchanged at 5.25% following a “finely balanced” decision.

The pound jumped 0.8% to $1.2776, reaching its highest level in 10 days. The BoE’s status quo decision came as the Federal Reserve signalled an end to its rate hiking campaign, sparking broad U.S. dollar weakness.

The vote at the BoE was 6-3 in favour of holding rates. But dissenters Greene, Haskel and Mann preferred a 25 basis point hike to 5.5%, showing a split view on the Monetary Policy Committee.

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BoE Governor Andrew Bailey pushed back against market expectations of rate cuts in 2024, stating “it is too early to talk about policy easing.” The bank sees an unclear outlook with risks in both directions.

Inflation remains sticky in the UK, slowing at a slower pace than international peers. Consumer price growth stood at 4.6% in November, while services inflation hit 6.6%, justifying the close call on further tightening.

The BoE left the door open to further hikes if price pressures fail to moderate. The path of British interest rates will depend heavily on upcoming economic data, kicking off with next week’s CPI release.

For now, the pound is rallying on rate differential flows as the Fed clearly signals an end to hikes while the BoE vows to remain vigilant on inflation. However, the two central banks appear to be diverging.