The shift in interest rate expectations should provide important Sterling protection in the short term. Although GBP/USD will be vulnerable to some profit taking support is likely into the 1.3270 area.
GBP/USD found support below 1.3200 in late US trading on Wednesday and again at the European open on Thursday as caution prevailed ahead of the interest rate decision.
As expected, the Bank of England maintained interest rates at 0.25% following the latest policy meeting and the 7-2 vote was also in line with consensus expectations.
According to the statement, most members agreed that some withdrawal of stimulus was likely over the next few months. There were also comments that slack in the economy was diminishing at a faster pace than expected while inflation in October was likely to move above 3.0% compared with previous expectations of around 3.0%.
Overall, the rhetoric was more hawkish than previously and sparked speculation that rates could be increased at November’s policy meeting.
Sterling pushed sharply higher immediately following the release with GBP/USD immediately strengthening to near 1.3300 against the dollar as EUR/GBP dipped to fresh 5-week lows below 0.8950.
The US CPI data was slightly stronger than expected with a headline increase of 0.4% for August, the strongest monthly increase since February with the annual rate increasing to 1.9%. The core increase was in line with consensus expectations at 0.2%.
The dollar strengthened in immediate reaction to the data, although it failed to sustain its best levels.
Sterling continued to gain ground with significant momentum on expectations that the Bank of England would move to raise interest rates in the near term.
Overall, GBP/USD advanced to fresh 12-month highs above 1.3370 before encountering some profit taking.
Bank of England Governor Carney stated that he was part of the majority of the committee that had registered a shift in view and that the probability of a rate increase had definitely increased which triggered a further GBP/USD move to near 1.3390.
GBP/USD 4-Hour Chart