Sterling falls to six-month trough after Bank of England's decisions

Sterling fell in European trade against a basket of major rivals, sharpening losses against dollar for the fourth straight day and plumbing a six-month trough as Bank of England paused interest rate hikes last week.

As both the Fed and BOE paused interest rate hikes last week, the rate gap between both US and UK remained at 25 basis points, and could likely expand in favor of the US if the Fed raised interest rates once more this year. 

GBP/USD

GBP/USD fell 0.2% to 1.2213, the lowest since March, with a session-high at 1.2257, after losing 0.5% on Friday, the third loss in a row as investors buy up the greenback.

The pound lost 1.2% against US dollar last week, the third weekly loss in a row following Bank of England and the Federal Reserve policy meetings.

BOE

Bank of England voted to hold interest rates unchanged at 5.25%, the highest since March 2008, confounding expectations of a 0.25% hike to 5.5%.

Such a pause is the first for Bank of England since it launched the current cycle of interest rate hikes in December 2021, in turn hurting the pound's standing.

The BOE stated it'll continue to monitor inflation indices and economic data, adding that the policies have become tight enough to bring inflation to the 2% target.

The BOE's press release pointed to the slowing down consumer prices and labor conditions, and weaker business sentiment as basis for the decision.

BOE Governor Andrew Bailey asserted the bank will continue to monitor data to judge the need for another interest rate hike.

However he noted how inflation tapered off in recent months, which is a trend expected to carry on.

UK Rates

After the meeting, chances of a 0.25% interest rate by Bank of England in November tumbled to 64% from 81%.

Chances of an interest rate cut in September, 2024 rose from 27% to 55%.

Interest Rate Gap

The current interest rate gap between the US and UK stands at 25 basis points, the lowest since March 2022, but is likely to rise to 50 basis points by the end of the year amid strong prospects of another US interest rate hike.