GBP/USD: Sterling Zig-Zags After Bank of England Keeps Rates Unchanged

UK central bank believes inflation is moving away as it’s preparing to start cutting interest rates in the coming months.

• The GBPUSD pair fluctuated wildly early Thursday after the Bank of England decided to keep interest rates unchanged at 5.25%. More importantly, the central bank’s forward guidance indicated that policymakers were growing more confident about lowering borrowing costs in the coming months. The sterling dropped about 0.2% to trade near $1.2450 moments after the announcement.
• While inflation in the UK has fallen substantially, it still remains above the ideal 2% target. Keeping interest rates unchanged — for the sixth straight meeting — was already baked in and expected by currency speculators. And while seven members of the committee voted to hold, two others preferred to cut interest rates immediately. At the previous meeting, only one member chose to trim rates.
• Price pressures in the UK eased to 3.2% in March, down from 3.4% in the previous month. Prospects of lower interest rates are generally bearish news for the sterling. The UK currency will yield less in a low-interest rate environment. And vice versa, when rates climb, they tend to boost the valuation of the local currency.