GBP/USD Surges as Bank of England Raises Rates and Focus Shifts to US Nonfarm Payrolls

During the early Asian session on Friday, the GBP/USD pair rebounded, gaining 0.17% for the day and reaching 1.2730 after breaking a four-day losing streak.

The Bank of England (BoE) made a bold move in its August policy meeting by raising interest rates by 25 basis points (bps) to 5.25%. This increase brought rates to their highest level in 15 years, signaling the central bank’s commitment to combat soaring inflation. Market participants had already anticipated this move, with expectations of two additional rate hikes before the year’s end, given the UK’s inflation rate, which stood at a staggering 7.9% in June. This figure is nearly four times the BoE’s target of 2% and more than double the US inflation rate.

BoE Governor Andrew Bailey addressed concerns about the future policy outlook, stating that the central bank expects inflation to ease to around 5% by October. However, he made it clear that there is no predetermined path for interest rates, leaving room for flexibility in their approach.

In contrast to the BoE’s tightening stance, the US economic indicators painted a mixed picture. The US Department of Labor reported that Initial Jobless Claims for the week ending July 29 matched expectations at 227,000. However, the ISM Service PMI for July declined to 52.7 from the previous reading of 53.9, indicating a slowdown in the service sector’s growth. Furthermore, Unit Labor Costs for Q2 came in at 1.6%, below the expected 2.6%.

Notably, the Federal Reserve had already raised interest rates by a quarter percentage point in its July meeting. Unlike the BoE, market sentiment suggests that the Fed might be nearing the end of its tightening cycle.

As the trading day progresses, all eyes are on the US Nonfarm Payrolls data, which is expected to have a significant impact on the GBP/USD pair. Investors are closely watching for any hints of direction in the pair, and the US Unemployment Rate and Average Hourly Earnings data, scheduled for release on Friday, will also play a vital role.

Since there are no major economic data releases from the UK at present, market participants are likely to digest the statements from the recent BoE meeting. The dynamics of the USD will remain the primary driver for the GBP/USD pair in the absence of any other influential news.