The British pound surged to its highest overall level since the June 2016 Brexit referendum, reaching a value of 86.4 on a Bank of England index where 100 equals the baseline set in 2005.
The currency pair GBP/USD traded firmly above the middle of the 1.34 level. It touched 1.3503 before pulling back to about 1.3471 as U.S. midterm elections and dollar weakness shaped currency markets.
Sterling rose 0.39% against the greenback to $1.3440. The euro gained 0.65%.
Traders noted that relative political stability and solid growth have helped alter market perceptions of the UK economy.
Midterm Vote Counts Drive U.S. Dollar Lower
The U.S. dollar dropped to its lowest level in over a month as early midterm vote counts pointed to increased probabilities of a Democratic victory.
That political outlook spurred safe-haven demand for U.S. Treasuries. Yields moved lower and undercut the greenback.
Currency markets also reacted to a 2% to 3% drop in oil prices following reports regarding diplomatic outreach toward Iran.
Brent crude futures traded at $108.37 a barrel. They remained well above pre-Iran war levels despite the daily decline.
ING analysts observed that the Federal Reserve maintains a hawkish stance amid 3.4% annualised third-quarter U.S. growth and inflation running above target.
U.S. employment data showed private-sector hiring via the ADP report, surpassing what was forecasted.
JOLTS job openings rose from 7.2 million to 7.5 million in September. The ISM Services PMI fell to 54.5 in October from 54.9 the previous month, missing forecasts.
Bank of England Prepares First Rate Hike Since 2023
Central banks like the Federal Reserve raised interest rates earlier to combat inflationary pressures from energy price spikes. The European Central Bank did the same. The Bank of England maintained a wait-and-see approach.
Markets fully priced in a 25 basis point Bank of England rate hike to 4% on Thursday. It represents the central bank’s first increase since August 2023.
Until now, the Bank would argue it’s been on ‘active hold’. It was set to cut rates by upwards of 50 basis points this year, so simply not doing that amounted to de facto tightening. By that logic, the Bank has added a similar amount of policy restriction as the European Central Bank, which has lifted its deposit rate twice,
ING economists and strategists
Economists at ING highlighted that escalating energy costs compelled the central bank to act despite underlying economic data.
Inflation is projected to climb above 4% early next year from its current 3.5% rate.
This monetary policy decision follows the first budget delivered last week by British finance minister John Healey. Markets absorbed it without significant disruption to sterling or gilts.
Jim O’Neill, an economist and former Treasury minister, remarked that people were underestimating the improving economic momentum in the United Kingdom.
According to Prime Terminal figures, money markets assigned a complete probability to a rate hike while pricing a 26% chance of a further increase at the December meeting.
Market participants observed the British pound testing resistance levels. Immediate barriers sit near the 78.6% Fibonacci retracement at 1.3556 and cycle highs reaching 1.3670.
Downside support rests near the 200-day moving average at 1.3424 and the 50% retracement level at 1.3404, with further structural support levels extending down to 1.3138.
