Buy the rumor, sell the news. Will this market adage hold true for the GBP/USD as the Bank of England prepares to deliver its widely anticipated first interest rate hike since 2023? Much will depend on the tone and guidance accompanying the decision. Let’s examine the key drivers and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of England will likely raise the repo rate to 4%.
- Political stability is supporting the pound.
- Derivatives are exaggerating the extent of monetary tightening.
- The BoE’s signals provide further grounds to add to long positions in the GBP/USD opened at 1.3335.
Daily Fundamental Forecast for Pound Sterling
Every central bank eventually has to take the plunge. Unlike its peers, the Bank of England has been reluctant to raise interest rates. MPC officials have long maintained that rising bond yields were already tightening monetary conditions without the need for further rate hikes. They also argued that higher energy prices were showing little sign of spilling over into core inflation. However, the time for action appears to have arrived. Expectations of the BoE’s first monetary tightening since 2023 are boosting the GBP/USD pair.
All 35 Bloomberg-surveyed economists expect the Bank of England to raise its policy rate from 3.75% to 4% following its November 5 meeting. Sixty percent anticipate a 7–2 vote for the increase, while another 24% expect a 6–3 split. This would represent a significant shift from September, when only three members of the Monetary Policy Committee voted for tighter monetary policy.
Market and Expert Expectations for REPO Rate
Source: Bloomberg.
Looking at the GBP/USD rally through the lens of the “buy the rumor, sell the fact” principle, it becomes clear that the expected monetary tightening has already been priced in. The market’s focus is now shifting to the Bank of England’s next moves. This is where opinions diverge. Derivatives markets are pricing in four additional repo rate hikes by July, while economists are more cautious. They put the probability of another increase in borrowing costs in the first quarter of 2027 at just 50%.
At first glance, markets appear to be overestimating the scale of monetary tightening. Their aggressive rate-hike expectations have allowed the Bank of England to remain on the sidelines for much of the year. Rising UK bond yields, driven by expectations of tighter monetary policy, have already tightened financial conditions and helped contain inflation without any action from the central bank. Indeed, the BoE’s recently released indicator shows no signs of accelerating consumer prices. However, how much longer can the regulator afford to stand pat?
UK Inflation Change
Source: Bloomberg.
According to a survey of UK businesses, the November repo rate increase is expected to be followed by an extended pause in monetary tightening. Companies’ inflation expectations for the next 12 months edged up from 3.7% to 3.8%, matching their current price expectations. The Bank of England therefore expects inflation to remain stable. Against this backdrop, is there really a case for further rate hikes?
Opinions are divided in both the markets and within the MPC. Even moderately hawkish rhetoric from the BoE could further support the GBP/USD. The pound is benefiting not only from expectations of higher interest rates but also from political stability and developments in the bond market. The political backdrop is also supporting sterling. Voters have responded positively to Andy Burnham: during his first 100 days in office, his party opened up an eight-point lead over its closest rival. This represents the strongest polling result for a prime minister since 1955.
Daily Trading Plan for GBP/USD
Any signals from the Bank of England that further monetary tightening may be on the way would create an opportunity to add to long positions in GBP/USD opened at 1.3335. Otherwise, it may be time to lock in partial profits.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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