GBP/USD fell 0.7% to 1.3356 on Friday as US employment data overrode a Bank of England rate hike. The pair dropped to $1.3356 after the release, wiping out a six-session rally that had carried it from the 1.33 area to 1.3490. Before the US jobs report, sterling traded at 1.3390, with a session high of 1.3463. Cable now sits back inside the moving-average cluster that has capped and supported the pair since the summer.
US Payrolls and a Dovish BoE Decision
According to the Bureau of Labor Statistics, the US economy generated 165,000 new jobs in October, significantly surpassing the expected 70,000. The September job figure was revised upward from 29,000 to 60,000, while unemployment decreased from 4.2% to 4.1%. Average hourly earnings increased by 0.4% for the month, outpacing the anticipated 0.3% rise. The dollar quickly strengthened, becoming the top-performing currency among the G10 group shortly after the data release.
A day prior, the Bank of England increased its Bank Rate by 25 basis points to 4%, with an 8–1 vote. Catherine Mann was the sole dissenter, advocating for a 50 basis point hike. The Bank now forecasts inflation to reach 4.9% by the second quarter of 2027, and several members indicated that further rate increases are likely. Despite this, sterling remained largely unchanged at 1.3467 on Thursday, only to lose ground on Friday.
The timing of the Bank of England’s decision negatively impacted sterling. The Bank’s November forecasts were based on Brent crude oil futures averaging $108 per barrel over 15 working days until October 27. However, Brent is currently trading at $97.02, a 10% decrease. This decline weakens the argument for another UK rate hike, while the robust US job market strengthens the case for a December Fed rate increase.
Cable is now trading on US data, and that leaves the near-term risk pointing lower. A close below the 1.3350 support zone targets 1.3137, while a break above 1.3500 invalidates the bear case. The pair is expected to hold in a 1.3250 to 1.3500 range through the December Fed decision on the 9th and the Bank of England meeting on the 17th.
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Market participants are focused on the inflation path. The BoE projects CPI at 4.9% for 2027 Q2 and does not see inflation returning to the 2% target until late 2028. Direct energy effects contributed 1 percentage point to September’s CPI. The October Budget measures are expected to take 0.25 percentage points off inflation by mid-2027.
For currencies, the terminal rate is more significant than the next rate change, and the Bank’s actions on Thursday did not raise expectations for the terminal rate. The Bank’s Market Participants Survey indicates a median Bank Rate of 4% post-meeting and 4.25% in February, which is below the short-term rate curve, suggesting traders anticipate more tightening than forecasters.
Leading up to the Bank’s decision, UK economic data was mixed. The October flash composite PMI rose to 53.1, an eight-month high. The labor market is stabilizing rather than tightening, with unemployment at 4.7% and regular pay growth at 3.7%. However, services inflation increased from 3.4% to 3.7%, indicating broadening price pressures.
Housing is where the hike will bite first. Benchmark two-year mortgage rates have risen by nearly 50 basis points since the start of September. Mortgage approvals fell to 53,400 in September, below the six-month average of 58,800. Average five-year fixed mortgage rates reached 6.00% in early October. This weak housing market suggests that a second rate hike could further dampen activity.
The December Fed Meeting and Outlook
The next critical event for the dollar is the Federal Reserve’s policy decision on December 9. Futures markets currently price an 74.8% probability of a 25-basis-point hike to the 4.00% to 4.25% range. The two-year Treasury yield sits at 4.54%, while the ten-year yield is at 4.90%. The jobs report and hawkish comments from Fed officials have reset the rate expectations for the December meeting.
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For cable, the rate differential between the UK and the US is the primary driver. Bank Rate now stands at 4%, while the Fed funds target is at 3.75% to 4.00%. This 12.5-basis-point gap is narrow, and a December Fed hike would push the Fed’s midpoint to 4.125%. This move would reverse the rate advantage in favour of the dollar before the Bank of England meets again in February.
The outlook for sterling remains constrained by the dollar’s dual engines. The dollar benefits from a hiking cycle and risk aversion in the equity markets. The Nasdaq fell 5.52% on Thursday, and the S&P 500 dropped 4.36%. Investors rotated into cash, which supports the dollar index. The dollar index is trading in a 101.50 to 102.50 range, and dealers expect it to settle toward the middle of that band.
This combination makes it difficult for the pound to gain ground. In a normal risk-off episode, sterling suffers because of the current-account deficit. In a normal rate-driven rally, sterling can hold up if the Bank of England is also hawkish. The current situation combines both forces, and the pound lost on both counts. Sterling and the euro fell 0.7% and 0.64% respectively on Friday.
Attention now turns to Tuesday’s inflation data release. The Bureau of Labor Statistics will publish the October consumer price index. As the Fed’s decisions are heavily influenced by inflation, the CPI will be more critical for the December rate decision than payroll data. A core monthly reading of 0.3% or higher would solidify the hike and push the currency pair toward the 1.3250 support level. A weaker reading would reduce hike odds to around 50% and allow the pair to recover to 1.3435.
