The Bank of England unanimously voted to leave interest rates unchanged at 0.50% and reiterated "further modest increases" were likely over next few years. In a knee-jerk reaction GBP/USD retreated, but held within a familiar trading range. The negative initial reaction was partly due to the regulator’s cautious rhetoric, as the market expectations got more upbeat after strong November CPI data.
Though the BoE tried not to be “hawkish” today, if CPI continues to accelerate further, Carney will have to intervene at some point in the future. And the next hike may take place earlier than the market expects assuming that Brexit negotiations don’t fail.
Moreover, despite the fact that sterling’s bullishness is still capped by the notorious political uncertainty around Brexit, we have decent UK economic fundamentals and dollar weakness which may not be cured by Trump’s tax plan (if approved at all). So the longer-term GBP/USD outlook looks bullish, especially considering the risk of slowing down the Fed’s rate hikes amid stubbornly low inflation.
After a brief dive under the 1.34 handle, the pound recovered partially, but stays under a mild short-term pressure. Earlier, the pair failed to extend the local rally above the weekly highs in the 1.3465 area. The most attractive strategy now may be to look for another pullback towards lows around 1.33 for opening new longs.
By Helen Rush
Senior Analyst at Capital Markets