Sterling held nearly steady on Thursday as markets absorbed an expected Bank of England rate increase and the dollar's earlier post-midterm decline lost momentum.
As of 07:15 ET (12:15 GMT), the pound was up 0.01% against the dollar at $1.3472, while the euro was down 0.04% at $1.1223. The dollar's correction following the U.S. midterms had been cooling off, with the DXY index pausing close to 101.5.
The BoE delivered a 25 basis-point rise in the Bank Rate to 4% by an 8-1 vote. Catherine Mann was the lone dissenter, preferring a larger 50 basis-point move. The voting split appeared somewhat more hawkish than the 7-2 split ING had anticipated, but sterling's market response remained muted.
Analysts and market participants noted that Wednesday's gains in the pound were primarily the result of dollar softness rather than a change in UK fundamentals, with HSBC also pointing to expectations of a BoE hike and reduced fiscal concerns as supporting forces.
The minutes and accompanying commentary from policymakers provided mixed signals about the path ahead. BoE Chief Economist Huw Pill said "a single 25-basis point hike is unlikely to be sufficient," while Megan Greene commented that "additional hikes will likely be required going forward." By contrast, Alan Taylor characterized the move as "a one-for-now insurance hike," asserting that "this is not the start of a hiking cycle."
The BoE projected consumer price inflation rising to around 5% by mid-2027. Its next policy decision is scheduled for Dec. 17.
Market expectations around the timing of further tightening remain varied. ING's base case continues to be a follow-up move in February, a prospect its models say is already fully priced in. Francesco Pesole, an FX strategist at ING, noted that "the bar for a hawkish surprise lifting the pound seems fairly high."
Pesole also argued that the dollar's recent weakness, prompted in part by the Democratic midterm sweep, has limited room to extend unless U.S. rates begin to move against the dollar in a sustained manner.
Movements in oil and short-term swap rates provide additional context for market positioning. With crude down about 8% on Wednesday, two-year U.S. dollar swap rates fell roughly 5 basis points, while two-year swaps in euros, sterling and the New Zealand dollar declined in the order of 8-10 basis points. Pesole suggested that this pattern is a compelling reason to avoid pushing the dollar substantially lower at this stage.
Economic data released recently offered a mixed, yet in some respects hawkish-leaning, picture for the U.S. ISM services came in slightly softer than expected, but its employment subindex rose to 51.4 - the highest reading since February. ADP private payrolls printed at 86,000.
Attention now turns to Friday's U.S. nonfarm payrolls, where the consensus forecast is for a 65,000 increase and the market "whisper" sits around 70,000. Ahead of that report, the calendar includes Challenger job cut announcements and third-quarter unit labour cost data.
In summary, a routine BoE hike and mixed guidance from policymakers left sterling largely unchanged, while the dollar's earlier decline has paused. Market participants are awaiting U.S. payrolls and other labour-market gauges for the next directional cue.