GBP/USD Weekly Forecast: BoE Policy Toolkit and Market Sentiment

The pound has faced selling pressure following the Bank of England's decision to maintain the Bank Rate at 4.75% according to the BoE's policy summary. GBP/USD has retreated from recent highs, though the currency remains within a narrow range as investors weigh persistent inflation data against global economic uncertainties.

November 2024 data showed CPI at 2.6% and CPIH at 3.5% according to the ONS release, with persistent core inflation in goods and services and food price increases cited as key drivers. The BoE emphasized ongoing vigilance against inflation persistence, noting risks from global geopolitical tensions and uncertain labor market dynamics.

Given these persistent inflationary pressures, the BoE has adopted a cautious stance. The Monetary Policy Committee signaled that rates will remain restrictive until medium-term inflation risks abate. This approach has left GBP/USD trading range-bound, with further movement likely tied to upcoming inflation readings and domestic labor market data.

BoE's Policy Tools and Growth Considerations

This follows the Bank of England's recent decision to hold rates steady. Facing persistent inflation pressures, the BoE continues relying heavily on forward guidance and its existing quantitative easing framework rather than adjusting the Bank Rate immediately. The MPC emphasized it will keep the rate at 4.75% for now, using communication to shape expectations while monitoring risks. Private sector wage growth is seen as a key driver for 2025, with projections pointing to a 3-4% increase. This level of wage growth could sustain economic momentum without immediately sparking a major inflation surge. However, the central bank warns that wages accelerating beyond the 4% mark could create overheating pressures. Such a scenario might force a more abrupt policy shift, potentially leading to rate hikes much sooner than currently anticipated. The BoE remains in a watchful mode, balancing the desire for stronger growth against the imperative to firmly re-anchor inflation expectations.

GBP/USD Sentiment & Emerging Catalysts

Building on recent market developments, trader positioning in GBP/USD remains cautious amid uncertainty surrounding speculative activity. While specific CFTC data for November 2024 isn't available in the latest reports, market participants are closely monitoring positioning trends through alternative channels. The absence of clear speculative net positioning signals adds a layer of opacity, making fundamental drivers like funding costs and policy expectations more critical for short-term direction.

Rising global funding costs are notably dampening the appeal of traditional carry trades involving the British pound. The Bank of England's maintained Bank Rate at 4.75% creates a significant hurdle for investors seeking yield advantages, especially when compared to higher-yielding currencies elsewhere. This restrictive stance, while aimed at taming persistent domestic inflation pressures cited by the MPC, inherently limits the pound's attractiveness for carry strategies. The combination of elevated rates and weaker GDP growth projections signals an environment less conducive to leveraging currency carry.

Political developments represent a major source of potential volatility. The upcoming UK budget announcement stands as a key catalyst, carrying substantial risk for the pound. Market expectations are highly sensitive to any indications of expanded fiscal spending or tax cuts that could reignite inflation pressures, potentially forcing the BoE to maintain restrictive policy for longer than anticipated. This scenario could initially support the pound but risks undermining confidence in the sustainability of UK fiscal management long-term. Investors must balance the immediate reaction against the broader macroeconomic implications.

Looking ahead, scheduled economic data and central bank communications will provide clearer signals. The next release of UK inflation data will be closely watched for clues on whether disinflationary momentum is strengthening or stalling. Simultaneously, speeches from Bank of England policymakers will offer crucial insights into the committee's evolving assessment of inflation risks and the path for future rate decisions. These inputs, combined with any evolving US monetary policy signals, will likely dominate GBP/USD movement in the coming weeks, potentially overshadowing existing positional uncertainty.