Pound holds near 10-week high as BoE stays on hold

The British pound held close to a 10-week high against the US dollar on Friday.

Traders assessed a week dominated by central bank decisions.

The Bank of England (BoE) kept interest rates unchanged.

It also warned about inflation risks linked to the Iran war.

Sterling was little changed at $1.3606.

It was slightly weaker against the euro at 86.32 pence.

This followed a sharp rally in the previous session, when the currency gained against both counterparts.

Month-end flows seen behind sharp rally

Analysts pointed to technical factors behind Thursday’s strong move.

As cited in a Reuters report, ING analysts said the previous session’s rally “may have been a function of month-end flows, where equity portfolio managers were rebalancing into UK asset markets after their underperformance in April.”

Fund managers often maintain fixed regional allocations.

They buy or sell assets to restore balance after market fluctuations.

This can lead to sharp but temporary currency moves.

Liquidity remained thin on Friday.

Holidays across much of Europe reduced trading volumes.

This limited further movement in the pound.

BoE highlights wide range of inflation scenarios

The Bank of England’s policy meeting remained the key focus for markets.

The central bank outlined multiple possible economic outcomes tied to the Iran war.

Some scenarios could require “forceful” rate increases.

Others may not require any tightening at all.

Governor Andrew Bailey said policymakers face a “difficult judgement call” in the coming months.

He warned that waiting for clear signs of inflation could risk acting too late.

Bailey added that he did not want to push back against market expectations for at least two rate increases this year.

He described current policy as being on an “active hold.”

Markets divided on rate hike outlook

Market pricing reflects uncertainty around future policy moves.

Traders see the probability of a June rate hike as roughly even.

They also expect two 25-basis-point increases across the BoE’s next three meetings through September.

However, analysts caution that the outlook remains highly uncertain.

External factors, particularly energy markets, could shape the path ahead.

Morgan Stanley analysts said, “A world where the supply of commodities out of the Middle East starts to normalise in the coming weeks would mean very little chance of policy tightening this year, we think - and no chance of a June hike,” as cited in a Reuters report.