British Pound: BoE holds but inflation risks linger – OCBC

In a recent decision, the Bank of England (BoE) maintained its Bank Rate at 3.75%, voting 6-3. This came amidst concerns about an increasingly tough inflation situation. The Consumer Price Index (CPI) is projected to climb to approximately 3.75% in the fourth quarter and slightly surpass 4% at the start of 2027. This is largely due to rising energy costs.

The BoE acknowledged limited evidence of significant wage and price influences from second-round effects. The GBP experienced a decline overnight, even as the broader USD/UST yield eased. The most notable market move was in gilts, where 30-year yields declined by around 12 basis points, thanks to the BoE's plan to overhaul its Quantitative Tightening (QT) program and a six-month pause in active gilt sales.

Despite a marginal potential support for GBP in the near term, the overall outlook hinges on whether the higher energy expenses will spread to domestic inflation. The markets have already priced a near certainty of further tightening, with nearly 100 basis points expected by July 2027, which might not offer much additional support from rate expectations alone.

If there is further proof that inflation pressures are easing, it could challenge this viewpoint. The GBP closed at 1.3360, with a bearish daily momentum and an oversold Relative Strength Index (RSI). The bias suggests a possible intra-day bounce, but the overall trend remains negative. Key support levels are at 1.3310 (23.6% Fibonacci retracement of the 2026 high to low) and 1.3270, while resistance levels are at 1.3420 (38.2% Fibonacci retracement) and 1.3480 (50-day Moving Average).