CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US English

Headwinds for GBP as Bank of England rate decision looms

By Neil Dennis

11:13, 14 December 2021

Pound notes
The pound is at a year low against the dollar - image: Shutterstock

Further improvement in the UK’s labour market helped stocks bounce on Tuesday, but sterling remained mired at a 12-month low against the dollar as investors continued to wind down bets on the Bank of England raising interest rates on Wednesday.

Three weeks ago, markets were pricing in the near-certainty that the Bank of England will raise the main bank rate on Thursday from 0.1% to 0.25% after it declined to do so at the November monetary policy meeting.

Now, it appears money markets are only pricing in around a 15% chance the Bank will pull the trigger in two day’s time.

“The Committee showed in November that it’s comfortable with waiting for more data – and we aren’t going to know for sure what Omicron means for the UK recovery for a least a couple more weeks,” said James Smith, developed markets economist at ING.

Restrictive measures

As a safeguard against the rapid spread of the Omicron coronavirus variant across the UK, Prime Minister Boris Johnson introduced measures last week that included a work from home advisory and proof of vaccination for entry into certain venues, as well as mandatory mask wearing in many public indoor settings and on public transport.

Then, on Sunday, the PM issued a stark warning about the “tidal wave of Omicron” and said that the government’s response would be to offer all adults a vaccine booster before Christmas.

Sterling fell 0.4% against the dollar on Monday and, on Tuesday, remained just a few pips above its lowest point for a year versus the US currency, as markets prepare for an onslaught of data and major central bank decisions this week.

“With the number of Omicron infections being driven up by what Prime Minister Boris Johnson has described as the ‘remorseless logic’ of exponential growth, the chances of a UK interest rate rise this week are heading in the exact opposite direction,” said Jay Mawji, director of global liquidity provider IXPrime.

What is your sentiment on GBP/USD?

Vote to see Traders sentiment!

Rising inflation

On Wednesday – a day ahead of the BoE decision – monthly consumer price index (CPI) data are published and expected to show annual headline inflation rose to 4.7% in November from 4.2% in October. The bank now expects headline CPI to breach the 5% level in April next year after utility price caps are raised.

“Even though there’s a strong chance that Wednesday’s inflation data will be a blowout, the Bank is now almost certain to ignore it and delay a rate rise once again,” said Mawji. He concluded: “With the odds of a December interest rate rise now looking longer than those of a White Christmas, sterling is swooning.”


145.00 Price
+0.560% 1D Chg, %
Long position overnight fee 0.0113%
Short position overnight fee -0.0195%
Overnight fee time 22:00 (UTC)
Spread 0.090


1.26 Price
-0.380% 1D Chg, %
Long position overnight fee -0.0046%
Short position overnight fee -0.0036%
Overnight fee time 22:00 (UTC)
Spread 0.00130


0.66 Price
-0.390% 1D Chg, %
Long position overnight fee -0.0072%
Short position overnight fee -0.0011%
Overnight fee time 22:00 (UTC)
Spread 0.00050


1.08 Price
-0.300% 1D Chg, %
Long position overnight fee -0.0080%
Short position overnight fee -0.0003%
Overnight fee time 22:00 (UTC)
Spread 0.00050

Should the latest Covid restrictions imposed by the government last week begin to show signs of slowing the economy, the Bank could plausibly wait longer to begin its rate increases. Markets reacted negatively to the measures on expectations economic growth will slow in the coming months.

‘Lockdown mentality’

“We are concerned that the rhetoric from some in government risks instilling a lockdown mentality when in actual fact the proposed measures are far short of that,” said Tony Danker, director-general of the Confederation of British Industry.

He added, with reference to the government’s work from home advisory: “Some economic activity is displaced to local areas, but it also leaves our town and city centres under real strain for retailers and hospitality. WFH in practice meaningfully restricts trade for some businesses and impacts mental health too.”

Federal Reserve hawks

Sterling’s year low against the dollar comes as the US Federal Reserve’s open market committee (FOMC) meets on Wednesday to decide on policy.

Having dropped the “transitory” inflation theme, the Fed now appears to be on a more hawkish setting and some are expecting the central bank to speed up the pace of tapering its asset purchases so that interest rates can begin to be raised sooner.

“We expect GBP/USD downside risks to be larger, and when combined with a USD-positive outcome of Wednesday’s FOMC meeting, we could see cable trade within the $1.30-1.31 range by the end of the week,” said Francesco Pesole, FX strategist at ING.

UK economic malaise

Jane Foley, senior FX strategist at Rabobank, also suggests sterling’s weakness was already deep set given the evidence of slowing UK growth in recent months from PMI surveys and retail sales data, and that further restrictive measures will underpin the malaise.

“The data heighten concerns about the momentum of the UK economic recovery, particularly in light of the new restrictions,” Foley said.

She added: “In our view, sterling’s performance in recent months is suggestive of a broader malaise among GBP investors which can likely be explained by concerns over headwinds to UK growth and a lack of reassurances about the post-Brexit UK economic outlook.”

Read more: UK unemployment rate falls by 0.9% to 4.2%

Markets in this article

1.25561 USD
-0.00477 -0.380%

Related topics

Rate this article

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Still looking for a broker you can trust?

Join the 570.000+ traders worldwide that chose to trade with

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading