Sterling fell on Thursday after Bank of England announced a surprise pause in the cycle of rate hikes, sending the pound to six-month lows amid concerns about the interest rate gap between the US and UK.

Such a pause by the BOE was certainly possible after inflation fell to 1/15 year lows while both the Federal Reserve and Swiss National Bank paused interest rate hikes. 

The main surprise was Governor Andrew Bailey's less than bullish press conference, which hurt chances of another UK interest rate hike this year. 

GBP/USD

GBP/USD fell 0.9% to 1.2234, the lowest since March, with a session-high at 1.2347, after losing 0.4% yesterday, becoming the worst performing major currency after UK inflation tumbled. 

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 interestt rate hikes in Decemebr 2021, in turn hurting the pound's tanding.

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.

Bailey

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%.

US Dollar rose in European trade on Thursday against a basket of major rivals for the third straight session, scaling a six-month high as US treasury yields spike to multi-year highs following Fed's meeting.

The Federal Reserve paused interest rates but hinted strongly at another 0.25% rate hike before the year end, while cutting down prospects of a rate cut in 2024. 

The Index

The dollar index rose 0.25% to 105.70, the highest since March, with a session-low at 105.42, after closing up 0.2% yesterday following Fed's meeting.

US Yields 

US 10-year treasury yields spiked over 1.3% today on track for the third meeting in a row, hitting 16-year highs at 4.472% and bolstering investments in dollar. 

The Fed

As expected the Federal Reserve maintained interest rates unchanged at below 5.5%, already the highest since 2001.

It's a signal for the approaching end of the current policy tightening cycle. 

The Fed stated the pause intends to give a longer chance for recent policy decisions to manifest their impact on US data, even as inflation remains stubbornly away from 2%. 

The Fed said it'll continue to monitor data closely, especially labor and consumer prices data and global financial developments to determine the best path ahead for policies. 

Economic Outlook

The Federal Reserve's economic outlook report released yesterday included important modifications: 

Growth is now revised to 2.1% this year from 1.0% in June forecasts, while 2024 growth forecasts are revised to 1.5%, and 2025 forecasts are revised to 1.8%. 

Total inflation forecasts are revised to 3.3% this year, and 2.5% next year, and 2.2% in 2025. 

Core inflation forecasts are revise to 3.7% this year, and 2.6% next year, and 2.3% in 2025. 

The Fed maintained forecasts for target interest rates at  5.75%, hinting strongly at another interest  rate hike this year. 

Powell

Fed Chair Jerome Powell said Wednesday the process of controlling inflation is a long-term one, and interest rates are likely to remain high for an extended duration to bring inflation down. 

He added that another interest  rate hike won't impact the economy much but will help bring inflation towards the 2% medium target.

Jerome Powell expects inflation to reach the 2% target by the end of 2025, while remaining above 3% this year , adding the Fed is focused mainly on core inflation more than main inflation, which is influenced by volatile energy prices.

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 interestt rate hikes in Decemebr 2021, in turn hurting the pound's tanding.

Global markets await Bank of England's policy meeting later today amid important developments in the UK, including a tumble in inflation to 1-1/5 year lows, showing that the UK economy is falling faster than expected into recession.

The Federal Reserve decided to pause rate hikes this week, with the Swiss National Bank also issuing a similar decision, in turn paving the way for Bank of England to similarly pause interest rate hikes.

We'll try to lay out the possible and likely scenarios for today's policy decisions in Britain.

UK Data

UK consumer prices rose 6.7% y/y in August, the slowest since February 2022, and below forecasts of 7%. 

Core prices rose 6.2% in August, also below estimates of 6.8%

Such a steep decline in consumer prices shows the reduced inflationary pressures on Bank of England and bolsters the case for an end soon to the current cycle of policy tightening.

Timing

The Bank of England will issue its policy decisions on 11:00 GMT, with Governor Andrew Bailey talking later about the decision.

Bailey recently said outright the BOE is likely approaching the end of the rate hike cycle. 

Meeting Scenarios 

The first scenario: pausing interest rate hikes for the first time since December 2021, as the BOE continues to monitor data and conditions. 

This scenario would hammer the pound and bolster expectations of early interest rate cuts in 2024. 

Second Scenario: A surprise new interest rate hike by 25 basis points to 5.5%, the highest since 2008.

Such a hike would almost definitely would be the last this year and won't be followed by a similar one in November, with the BOE clearly hinting at the end of policy tightening. 

The Third scenario entails a rate hike, and strong hints of yet another interest rate hike in November.

This is obviously the most supportive scenario for the pound, however it's a scenario in heavy doubts as the economy faces struggles.