Six-week highs tested by British Pound as traders prepare for BoE tightening

1.3420 marks a six-week high for GBP/USD. The pair extends its rally to a third consecutive day.
Following the UK's 2026 budget release, Gilt yields fell as the Pound's rebound gathered pace.
Expectations of a BoE rate increase next week add support to the GBP.

1.3420 is the area GBP/USD is testing at the time of writing, around six-week highs. On Friday, the British Pound (GBP) extends its advance against the US Dollar (USD) to a third consecutive day and remains on course for a three-week rally. The reassuring UK budget earlier this week has supported the move, while attention now centres on a widely anticipated interest rate increase by the Bank of England next week.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Friday's UK Nationwide Housing Prices data showed no change in October, outperforming forecasts for a 0.2% fall. Prices had declined by 0.3% in September.

Nearly 10 basis points lower: UK bond yield falls as budget lifts Pound

Since Wednesday's budget release, the UK 10-year bond yield has fallen nearly 10 basis points, giving Sterling renewed momentum. Pound traders continue to welcome the neutral UK budget after high public debt and bond market turmoil had fuelled anxiety ahead of its release. For now, at least, the budget appears to have reassured markets.

Next week's Bank of England monetary policy decision is now the focus for investors. With recent macroeconomic figures showing continued UK growth and inflation still well above the bank's target, markets have almost fully priced in a 25-basis-points rate increase next week.

For the USD, US midterm election risks warrant attention, according to analysts at ING. They note: “A Democratic sweep is trading around 68% in prediction markets,” a prospect that “could be seen as slightly negative for the US dollar from a few angles,” in their assessment. These range from “higher risk of government shutdown and gridlock on debt ceiling negotiations” to “potential damage to already shaky AI-related sentiment.” Given those risks, ING says they “would be cautious in chasing the USD upside in the next few days.”

BoE: key questions answered

The Bank of England: what is its role and why does it matter for the Pound?

A steady inflation rate of 2%, or ‘price stability’, is the main objective of the Bank of England (BoE), which sets monetary policy for the United Kingdom. Adjusting base lending rates is its means of pursuing that goal. By setting the rates at which it lends to commercial banks and banks lend to one another, the BoE determines interest rate levels across the economy. Those decisions also influence the value of the Pound Sterling (GBP).

Sterling and monetary policy: how do BoE decisions feed through?

Inflation above the Bank of England's target prompts interest rate increases, raising borrowing costs for households and businesses. Sterling benefits because higher rates make the UK more attractive to global investors seeking a home for their funds. By contrast, below-target inflation signals slowing economic growth. In that situation, the BoE will consider cutting rates to reduce credit costs, hoping businesses will borrow to fund projects that generate growth. This is negative for the Pound Sterling.

Quantitative Easing (QE): what does it involve and what happens to the Pound?

When rate cuts cannot deliver the required outcome, the Bank of England can turn to Quantitative Easing (QE) as a last resort in extreme circumstances. The policy substantially expands the flow of credit through a stalled financial system. To implement QE, the BoE prints money and purchases assets from banks and other financial institutions, usually government bonds or AAA-rated corporate bonds. The Pound Sterling typically weakens as a result.

Quantitative tightening (QT): how does it work and affect Sterling?

As the economy strengthens and inflation begins to rise, Quantitative tightening (QT) reverses QE. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to stimulate lending. Under QT, it halts further bond purchases and no longer reinvests principal repayments from maturing bonds in its portfolio. The policy generally supports the Pound Sterling.