Following yesterday’s rate hike by the US Federal Reserve, it is the Bank of England’s turn to tighten its policy. The global economy faces elevated levels of inflation because of various factors, including from surging energy and commodity prices. While the Fed has just started its hiking cycle, the BoE is well on the way, having raised interest rates in its previous two meetings by 25 basis points each time. Another 0.25% hike is expected today, and the decision is likely to be unanimous.
If the above expectations are met, the pound should be able to regain further ground against the dollar, after the greenback fell in reaction to the Fed’s hike last night. The weakness in the dollar observed since last night’s Fed hike suggests the market had already priced in the rate hike and the Fed’s projection of 6 more hikes for this year.
The Bank of England announcement is due at 1200 GMT.
Given the Ukraine situation, I highly doubt the BoE is going to go for a 50 basis point hike at this meeting. It will be interesting to see how much the BoE will push back against expectation of over 6 rate hikes priced in for this year. Just like the Fed, the BoE will be keen to frontload rate hikes to address surging inflation, but then become more concerned in the latter parts of this year about the projection of economic growth. If inflation falls back later on in the year, there won’t be any need to hike rates by 6 or 7 times by year-end as the market is currently expecting.
Source: ThinkMarkets and TradingView.com
Ahead of the BoE decision, the GBP/USD has rebounded strongly from the psychologically-important 1.30 handle over the last few days. It has risen to rest the next potential resistance zone between 1.3160 (last year’s low) and 1.3190. A decisive break above this zone would tip the balance back in the bulls’ favour, potentially leading to a sharp continuation towards 1.3350. However, if the 1.3160-1.3190 resistance area holds firm, then a revisit of 1.30 cannot be ruled out. This may happen if the BoE is surprisingly more dovish than expected, although it is not my base case scenario.
