The pound edged higher ahead of the Bank of England’s interest rate decision, though trading was largely influenced by the impact of Donald Trump’s victory in the U.S. presidential election.
Policymakers are widely expected to cut rates at this meeting; however, the outlook remains uncertain after last week’s high-tax, high-spending Budget and Trump’s return to the White House—both of which economists predict will increase inflation.
Sterling rose 0.5% to $1.294, after experiencing its biggest one-day drop against the dollar since March 2023 on Wednesday, following Trump’s decisive win over Democratic rival Kamala Harris.
The pound and government bonds came under pressure last week after Rachel Reeves presented her first Budget, which included £40 billion in tax increases and a spending boost of around £70 billion over the next five years.
The Office for Budget Responsibility (OBR) projects faster growth and higher inflation in the coming years. According to the OBR’s forecast, consumer prices are expected to rise by 2.6% in 2025, well above the Bank of England’s 2% target, largely due to the Budget measures. This could compel the Bank to maintain higher interest rates.
Mohit Kumar, chief European economist at Jefferies, commented, “In our view, the OBR’s projections are overly optimistic. Given that it’s the month for the Bank of England’s monetary policy report, it will be interesting to see if their projections align with the OBR’s.”
The pound remained relatively stable against the euro, which stood at 83.3p.
