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22.09.202310:30 Forex Analysis & Reviews: Why did the Bank of England keep interest rates unchanged?

The Bank of England unexpectedly left interest rate unchanged, the first time in almost two years. Earlier forecasts assumed a 0.25% hike, which will push rates from 5.25% to 5.50%. However, this did not happen.

While the August CPI data in the UK indicated a noticeable decrease from 8.7% to 6.7%, which many saw as a positive development, it remains far above the Bank of England's target level of 2%. Therefore, rate hikes will not yet stop, but just be paused instead.

The Bank of England also acted similarly to the Federal Reserve, hoping that the decline in inflation would continue in the context of a slowing national economy and reduced demand for goods and services. After all, even though it acts in its own interests, the Bank of England follows the actions of the Federal Reserve, which sets the tone in global markets.

An example of this points to when all significant central banks worldwide took pauses in raising interest rates in September, except for the European Central Bank, which unexpectedly raised its rate to 4.50% from 4.25%. However, looking closely at the actions of central banks in Western countries, as well as Australia and New Zealand, the absolute values of their key interest rates remain close to the level of the Federal Reserve's rate, thereby balancing their interest rate levels. This maintains a relationship that allows local producers to compete in global markets with their goods and services.

So, will the Bank of England raise rates further? It will, but only if the Fed does so or if inflation in the UK starts to rise again. For now, after the pause, there may be a sideways movement in GBP/USD, following a small correction, However, if market sentiment deteriorates again, the pair may resume its decline amid a general demand for dollar as a safe-haven currency.

Forecasts for today:

GBP/USD

The pair found support at the level of 1.2260. Improved investor sentiment following yesterday's sell-off could lead to an increase in risk appetite and, as a result, a weakening of dollar. On this wave, the pair may correct upwards towards 1.2375.

EUR/USD

The pair currently attempts to show a local upward reversal, where its rise above the level of 1.0670 will lead to a rebound towards 1.0740.

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Pati Gani,
Analytical expert of InstaSpot
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