GBP drops as BOE vote split seems dovish
The Bank of England (BOE) has left rates unchanged at 4.75% as widely expected. The decision comes after a hotter-than-expected jobs reading on Tuesday and another rise in inflation. Average earnings both including and excluding bonuses rose to 5.2% in October from 4.4% and 4.9% respectively. On Wednesday, the latest inflation figures showed headline and core CPI rose to 2.6%and 3.5% in November respectively. Whilst the data was expected to come in strong, it confirmed that a rate cut from the BOE was completely off the table.
GBP/USD 4-hour chart
Past performance is not a reliable indicator of future results.
The initial reaction in the pound has been bearish, and this is likely due to the vote split being slightly more dovish than expected. Forecasts had predicted an 8-1 or 7-2 split, suggesting only one or two members would vote for a cut in December. The actual split of 6-3 means there have been three dissenters (Dhingra, Ramsden, and Taylor) which suggests the Monetary Policy Committee (MPC) members may be more nervous about the state of the economy than originally thought. Those who voted for a cut said sluggish demand has created a risk of unduly large output gap.
The outlook for 2025 remains uncertain, with the accompanying statement saying, “we can't commit to when or by how much we will cut rates in 2025" and "a gradual approach to future interest rate cuts remains right". There will be no press conference or updated economic projections at this meeting so markets will have to go on their intuition about how the central bank expects to adjust rates next year. Current pricing shows no material change in expectations following the decision, with approximately 50 basis points of cuts expected in 2025, the same as before the meeting took place.
On the charts, GBP/USD had dipped back below 1.26 following the announcement as the vote split gave it a dovish feel, but the pair is attempting to push away from the lows. Wednesday’s hawkish cut from the Federal Reserve caused a resurgence in the bearish trend after an attempted reversal earlier this week. The fact that the Fed was hawkish in its messaging, despite cutting rates, and the BOE seems to be slightly dovish, given the vote split, despite keeping rates on hold, is playing in favour of the USD when it comes to rate differentials, with US yields shooting higher and UK yields dipping slightly. Because of this, GBP/USD may find it difficult to regain a bullish bias now that we’re heading into the holiday season and there are little catalysts left.
Meanwhile, the FTSE 100 is attempting to push away from the recent lows. The more dovish outlook would play in its favour as it could enable better labour productivity and growth in the future. The main concern for equities is the possibility of stagflation, as inflation and wage growth remain high, whilst growth and consumer confidence are starting to falter. The potential for a period of slow growth is likely to weigh on the performance FTSE 100, especially as the US is expected to continue to outperform. A positive catalyst could be confirmation from the BOE that it has become more dovish, and it expects to cut rates faster than anticipated.
FTSE 100 daily chart
Past performance is not a reliable indicator of future results.