Pound Sterling edges higher as the BoE's deputy governors lean toward a hike

The Bank of England maintained its Bank Rate at 3.75% on September 17, with a majority of six votes in favor of keeping the rate unchanged. However, half of these six members indicated that a hike may be necessary if inflation pressures continue. Deputy Governor Ramsden suggested on Monday that there could be a case for raising the Bank Rate if the upside on the inflation outlook persists.

This view was echoed by Deputy Governors Breeden and Lombardelli on Thursday. The GBP/USD exchange rate closed just above 1.3250 for a second consecutive gain. Six BoE officials voted for a 4% rate on September 17; if Ramsden, Breeden, and Lombardelli join them in November, the committee would raise the rate by the same margin, leading to a vote against the Governor and two external members.

All three deputies emphasize the risk that energy prices, which impact wage bargaining and price-setting, pose. Both the European Central Bank (ECB) and the Federal Reserve (Fed) have raised rates since the Iran war began in February, yet the BoE has not. The BoE has been holding at 3.75% throughout 2023, citing its policy as already restrictive, while the ECB increased rates twice and the Fed once.

Ramsden's stance aligns with his previous arguments in the meeting minutes. The Pound Sterling requires UK interest rates to rise faster than US rates to recover, but the Federal Reserve's decision on October 28 remains uncertain, with futures suggesting another quarter-point increase. External member Taylor is scheduled to speak on Tuesday at 15:30 GMT, the only one of the six September holdouts to do so before Friday.

The UK's second-quarter GDP estimate will be released on Wednesday at 06:00 GMT, with forecasts at 0.4% QoQ and 1.2% YoY, both unchanged. External member Mann, who voted for a hike in the last two meetings, will speak on Thursday at 12:00 GMT. The US side carries more weight for GBP/USD, and key economic indicators such as the core Personal Consumption Expenditures (PCE) price index and the Nonfarm Payrolls report will set the odds of an October Fed move.

The Pound Sterling's resistance level is currently at 1.3300, broken on September 23, with 1.3350 as the next barrier. Support is found at 1.3200, the weakest level since late June. A break below this level could expose the late-June low near 1.3150, preceding 1.3100. The currency is generally best when the economy is strong, attracting foreign investment and potentially leading to higher interest rates from the BoE, strengthening the GBP.

Conversely, weak economic data can weaken the Pound Sterling. Another critical data release is the Trade Balance, measuring the difference between exports and imports over a specific period. A positive net Trade Balance strengthens a currency, while a negative balance can weaken it.