GBP today's trend: Rising oil prices offset Bank of England hawkish boost, pound slightly declines

Investing.com - The British pound fell on Friday, weighed down by rising oil prices and market sentiment. However, the pound still has the potential to record gains this week after the Bank of England unexpectedly signaled a hawkish stance, prompting the market to reprice UK interest rate expectations.

As of 12:52 GMT, the GBP/USD declined 0.3% to $1.34, partially reversing Thursday’s 1.31% rally. The pound has gained 1.2% so far this week.

The euro against the pound was nearly unchanged, as hawkish repricing by the European Central Bank and the Bank of England largely offset each other.

EUR/USD fell 0.2% to $1.15, retreating from Thursday’s 1.2% increase, despite the ECB clearly signaling a rate hike in April. The dollar still received initial support.

The Bank of England unanimously decided to keep borrowing costs unchanged on Thursday with a 9-0 vote, surprising markets where at least two committee members were expected to favor a rate cut. The most dovish member of the Monetary Policy Committee, Swati Dhingra, publicly discussed raising rates to stabilize inflation dynamics.

The currency markets responded quickly, with traders now pricing in about 80 basis points of rate hikes by the end of the year. ING warned that this pricing appears excessive and noted that the conditions for a second-round inflation effect are less apparent than in 2022.

Oil prices remain the dominant market driver, with Brent crude fluctuating due to conflicts in Iran and uncertainties in the Strait of Hormuz. Francesco Pesole, FX strategist at ING, said, “Interest rate expectations should remain fluid and depend on commodity prices, continuing to play a secondary role in the forex market.”

Pesole pointed out that although geopolitical developments continue to dominate broader market sentiment, the hawkish shift by the Bank of England still provides some additional support for the pound.

ING maintains a bullish stance on EUR/GBP, targeting 0.88 by the end of Q2, citing the May local elections and prospects of further rate cuts by the Bank of England.

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