BOE’s announcement sends the pound higher. Should you buy it?
- BOE hikes by 25bp
- Sterling jumps on the news
- 3 dissenters wanted a 50bp increase
The third central bank to raise interest rates this week is the Bank of England (BOE). It raised the interest rate to 1.25% earlier today, following the rate hikes delivered by the Federal Reserve of the United States yesterday and the Swiss National Bank today.
Global yields are rising on the back of hawkish forward guidance and tightening financial conditions from major central banks. As a result, the era of easy money is behind, and investors rush to find the best asset to park their funds.
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The US dollar has appreciated in the last twelve months against most of its peers. By the time the Federal Reserve started to hike, the dollar already had significant gains against other currencies.
While all major central banks embarked on tightening financial conditions (except the Bank of Japan), the Fed holds the advantage of hiking more and faster. As such, it is difficult for FX traders to interpret the currency market’s moves in light of one central bank only.
Take the GBP/USD exchange rate, for instance. On the announcement that the BOE has hiked, it declined, only to rebound sharply.
Details that followed pushed the sterling higher. For instance, three MPC members (Haskel, Mann, and Sounders) favored a 50bp rate hike. Hence, the door is open for further increases in the bank rate, but still not enough to win the catch-up game with the Fed.
How did the pound react?
After declining initially, the pound bounced back sharply. It is higher across the board, even recouping most of the losses incurred earlier against the Swiss franc.
Cable, as the GBP/USD exchange rate, is also called, moved back above 1.22. The technical picture reveals a possible inverse head and shoulders pattern, a reversal one.
Therefore, if the market holds above the neckline (shown in blue below), there is scope for further gains toward 1.25, as indicated by the pattern’s measured move.
Highlights of BOE’s decision
The central bank justified its rate hike as an action necessary to return inflation to 2%. The MPC voted 6-3 in favor of a 25bp rate hike, with 3 dissenters wanting a 50bp rate hike.
It makes sense to want higher rates, considering that the BOE announced today that inflation in the United Kingdom is expected to reach 11% by the end of the year.
Moreover, the BOE is anticipating a worsening economic outlook with weaker GDP growth and rising unemployment. Hence, the combination may weigh on sterling further down the road, despite the rate hike delivered by the BOE today.