GBPUSD: Pound Tests $1.35 in Solid Upside Swing, Bank of England Faces a Tough Call

Sterling trades near a seven-week high ahead of an expected rate increase, with guidance on further tightening likely to determine the next move.

💷 Sterling approaches $1.35 before the vote

• GBPUSD traded around $1.3490 early Thursday, after touching a seven-week high of $1.3503.
• Sterling was heading toward a sixth consecutive daily gain, supported by a softer dollar and expectations that the Bank of England will raise borrowing costs.
• The pound’s advance also reflects broader dollar weakness. Wednesday’s post-election rally in stocks and Treasuries lowered US yields, reducing support for the greenback.
• Back to the UK, markets expect a quarter-point increase to 4%, which would mark the BoE’s first hike since August 2023. With the move widely anticipated, the announcement itself may offer limited upside.

🏦 An expected hike leaves guidance in charge

• UK inflation reached 3.5% in September, well above the Bank’s 2% target. Energy costs linked to the Iran war have intensified the pressure. Policymakers must assess whether that shock will fade or become embedded in wage demands and business pricing, requiring a more persistent response.
• Investors may already expect more tightening than the BoE wants to deliver. Some economists anticipate officials pushing back against market bets on three to four increases in 2027. A rate hike accompanied by cautious guidance could therefore weaken sterling.
• This week’s oil-price retreat adds another complication. Sustained cheaper energy would ease one source of inflation pressure and potentially reduce the need for follow-up hikes.
• But the Bank must judge the durability of that move, with Middle East diplomacy still uncertain and earlier cost increases working through the economy.

🔎 The dollar and payrolls share the spotlight

• US employment data keeps the Fed outlook in play. ADP reported 86,000 additional private-sector jobs in October, above the 69,000 consensus.
• Friday’s government payrolls report now provides the more important test of whether hiring remains resilient enough to sustain expectations of further tightening.
• US jobless claims follow shortly after the BoE decision today, with payrolls due Friday at the same time. That sequence gives the pound-dollar several opportunities to reassess the relative outlook for British and American interest rates.
• The immediate reference is the $1.35 area, where sterling has already tested a seven-week high. Holding above it after the decision would strengthen the recovery case. A retreat would put the recent $1.34 area back in focus, particularly if the BoE tempers expectations for additional hikes.