Pound Weakens Following Bank of England's Decision to Maintain Interest Rates; Dollar and Yen Outlooks Shift

Investing.com -- Following the Bank of England's (BOE) decision to keep bank interest rates unchanged at 4.75%, the pound reduced its gains against the dollar and fell against the euro. This move was expected, but it is important to note that three out of nine policymakers voted in favor of an interest rate cut. The BOE forecasts a slight increase in inflation in the short term and indicates that economic growth by the end of 2024 may be weaker than previously anticipated. Policymakers face the challenge of maintaining price stability without leaving monetary policy too tight.

Following the decision, EUR/GBP rose from 0.8236 to 0.8264, while GBP/USD fell from 1.2631 to 1.2593. The Federal Reserve implemented a 25 basis point rate cut on Wednesday but indicated that it will slow the pace of cuts. US interest rates are expected to remain high for a longer period, leading to an expansion of policy divergence with other major central banks.

Meanwhile, the weakness of the yen increases the likelihood of foreign exchange intervention. Following the hawkish Fed meeting, the Bank of Japan (BOJ) maintained its interest rate, with a lack of urgency regarding rate hikes, resulting in USD/JPY rising significantly above 155. Despite being the weakest currency in the G-10 area, the expectation of higher US yields and a hesitant BOJ suggest that Japanese authorities may struggle to keep USD/JPY around the 160 level for much of 2025.