GBP/USD knee jerk reaction to hawkish Bank of England

Over a 200 point move in GBP/USD today initiated by the Bank of England keeping rates the same but giving the hawks a bone to feast on

GBP/USD knee jerk reaction to hawkish Bank of England

As expected the Bank of England (BoE) kept rates the same after the MPC voted 7-2 in favour of keeping rates unchanged.

Given the data we saw in the early part of this week, that result is unsurprising, however the BoE did offer the hawks a bone to chew one in their policy statement.

Stating that it could "reduce stimulus in the coming months" if the inflation rate continues to rise.

Bank of England keeping options open

To me, this is another way of saying they are data dependant. The fact they have given this hawkish slant suggests that they want to keep their options open.

In a perfect world they would leave rates alone for the minute while the UK digests the future impacts of Brexit. However if inflation continues to increase, the BoEs hand may be forced into tightening monetary policy and avoiding inflation getting out of control.

With a subdued earnings report this week, we may see inflation curbed in an organic manner as consumers will have less disposable income. A lack of pocket-money will see consumers veer towards saving until earnings can catch up with inflation.

GBP/USD reaction

With the data as it is though, it is wise for the BoE to keep their options open. The market has certainly taken todays news as bullish, after the inital knee jerk reaction to rates being held at the same level, we have seen GBP/USD print lows of 1.3149 before highs of 1.3371. 

GBPUSD 5 minute chart & annotation

From a technical stand point, we are now approaching the area of resistance we identified earlier in the week

Next week is quiet on the data front for the UK, however we do have the Fed funds rate on Wednesday, which will give us a better idea about their thinking. Considering we have finally seen their inflation rate beat expectation, their hike cycle may well on track to continue.

This will obviously affect GBP/USD, and could be a good reason to hold at that technical level.

 

Disclaimer: This should not be taken as investment advice, it is simply just my opinion.

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