Dollar Steadies as Pound Climbs After Bank of England’s First Rate Rise Since 2023

The US dollar steadied on Thursday after sliding to its lowest level in more than a month, as the dust settled from the US midterm elections and strong American jobs data gave traders a reason to stop selling. The dollar index, which tracks the greenback against a basket of major currencies, fell as far as 101.25 — its weakest since September 30 — before recovering to around 101.50. The euro climbed to about $1.1261, the yen strengthened to roughly 157.95 per dollar, and sterling pushed toward a seven-week high near $1.3503, as the post-election mood favoured riskier assets over the dollar.

The day’s headline belonged to London. The Bank of England raised its benchmark rate by a quarter point to 4%, its first increase since August 2023 and the end of a run of six consecutive holds. The Monetary Policy Committee voted 8-1 for the move, with the lone dissent coming not from a policymaker wanting to hold, but from Catherine Mann, who argued for a bigger half-point rise to 4.25%. The Bank acted because UK inflation rose to 3.5% in September and is now forecast to reach around 5% by the middle of next year, driven by energy prices as the conflict in the Middle East enters its ninth month. Governor Andrew Bailey stressed the rise should not be read as the start of an inevitable sequence of hikes, though he warned another was likely if the conflict continues.

Sterling barely flinched at the widely expected decision, trading around $1.3477 afterwards and on course for a seventh straight daily gain. Two-year gilt yields edged up to about 4.76%, a sign investors now expect UK rates to stay higher for longer. The bigger story for currency traders is the renewed divergence between central banks: the Bank of England is tightening again, the Bank of Japan’s September meeting minutes reinforced bets on further Japanese hikes, and the Federal Reserve is the one being watched for its next move — a split that is pulling money in different directions across the forex market.

That is also why the dollar’s slide stopped where it did. US private employers added 86,000 jobs in October, according to payroll processor ADP, comfortably beating expectations of around 69,000, while the ISM services index held at 54.5 and job openings rose by 333,000 to 7.523 million. Analysts at MUFG said they would not read the post-election fall in US yields and the dollar as the start of a broad sell-off, pointing to resilient labour demand, and ING argued that a still-strong US economy and at least one more Fed hike should limit any deeper dollar correction. Futures markets now put the chance of a quarter-point Fed increase in December at about 81%, according to the CME FedWatch tool.

Everything now hinges on Friday’s official US jobs report, due November 6. Economists expect payrolls to rise by roughly 55,000 to 65,000 in October, up from just 29,000 in September, with unemployment holding at 4.2% and wages growing around 0.3% on the month. A print well above 100,000 would cement the December hike and could hand the dollar back its lost ground; a weak one below 30,000, or unemployment above 4.3%, would force markets to rethink the tightening story. Until then, the lesson of the week is that elections move currencies for a day, but interest-rate gaps move them for months — and right now those gaps are widening in the pound’s and the yen’s favour. Before trading any of these moves, our forex tools can help you plan position sizes and risk. (Not financial advice.)