• GBP/USD corrects after its rally, despite a clearly more restrictive policy signal.
• The Bank of England surprises with a unanimous vote and sharply higher inflation forecasts.
• The US Dollar edges higher as expectations of prolonged Fed policy stability increase.

GBP/USD retreats on Friday, trading around 1.3380 at the time of writing, down 0.39% on the day, after Thursday’s strong rally following the Bank of England (BoE) decision. The corrective move comes as the US Dollar (USD) regains some traction, despite a broader backdrop shaped by a hawkish repricing of global monetary policy.

The Bank of England kept its rate unchanged at 3.75%, as expected, but surprised markets with a unanimous 9-0 vote, versus expectations of a 7-2 split in favor of a hold. This shift is particularly notable given the previous narrow 5-4 decision. The tone is clearly more hawkish, with BoE Governor Andrew Bailey stating that the central bank stands ready to act if inflation proves more persistent.

The Monetary Policy Committee (MPC) sharply revised its third-quarter inflation forecast higher to around 3.5%, up from 2% previously, mainly driven by rising energy prices linked to the Middle East war. Several members adopted a more hawkish stance, including Catherine Mann, who now sees the possibility of a prolonged hold or even a rate hike, while traditionally dovish Swati Dhingra also acknowledged that rates may need to rise.

On the US side, the Federal Reserve (Fed) held rates at 3.50%-3.75% and still projects one rate cut this year. However, Chair Jerome Powell highlighted elevated uncertainty linked to the Iran conflict. The dot plot also showed a growing number of officials no longer expecting rate cuts this year, lending support to the US Dollar.

The US Dollar Index (DXY) is rebounding toward 99.50 on Friday after hitting a daily low near 99.00 on Thursday, supported by rising expectations that the Fed will keep rates steady for longer, with chances of a hold by year-end now seen at 71.8% according to the CME FedWatch tool. This dynamic is capping the upside in GBP/USD in the short term, despite the BoE-driven support.

According to MUFG, the sharp repricing of UK rate expectations has led to a notable rise in yields, supporting the Pound Sterling (GBP), although the move may be somewhat overdone. The bank warns that a deterioration in risk sentiment, particularly if Middle East tensions escalate further, could weigh on Equities and reduce this support.

Meanwhile, ING believes that the market’s aggressive repricing toward further BoE tightening is likely excessive. The bank notes that, despite the hawkish shift, Oil price dynamics remain a key driver for GBP/USD, as energy influences both inflation expectations and global risk sentiment.