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Bank of England Hiking Cycle: FTSE 100, FTSE 250, GBP/USD, GBP/EUR Analysis


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GBP, FTSE 100, FTSE 250, BOE Analysis and News

  • BoE Rate Liftoff Despite BoE’s Cautious Communication
  • Historical Performance of UK Assets During BoE Hiking Cycles

Bank of England Official Bank Rate - Economic Calendar - FX Leaders

The Bank of England surprised market participants yet again by raising interest rates by 15bps to 0.25%. I say surprised given that ahead of the December meeting, notorious MPC hawk, such as Saunders cast doubts over a rate rise, having mentioned the potential advantages of delaying a hike in order to assess the impact of Omicron. That said, with the latest inflation reading making the MPC’s November forecast already outdated and the labour market remaining robust post furlough expiration, there was little excuse to not raise rates. Although, while it is a step in the right direction, I would say it is a rather tentative step, given that a 15bps rate hike is not exactly a move that shows a determination to curb inflationary pressures. Although, what it allows now is for the next hike to move in 25bps increments going forward. Yet again, this shows the BoE’s communication leaves very little to be desired when trying to gauge the timing of a BoE rate hike.

The question to ask yourself now is how fast and how many rates hikes for the Bank of England?. With the latter, money markets are pricing in at least three rate increases with a 28% probability of a fourth rate hike. However, it is important to remember that when the Bank rate reaches 0.5%, the Bank has more optionality with the ability to stop reinvestments (a Bank rate of 1% allows the BoE to carry out asset sales) and thus, this may reduce the likelihood that we see three hikes in 2022.

Money Markets Pricing in an Aggressive Hiking Cycle, Risks Geared Towards Disappointment

Bank of England Hiking Cycle: FTSE 100, FTSE 250, GBP/USD, GBP/EUR Analysis

Source: Refinitiv

That being said, now that we have seen the BoE’s rate liftoff, the table below shows the typical performance of UK assets in the following three months after the Bank’s first rate hike.

From an index perspective, BoE hiking cycles have been bullish for risk markets, more so the Internationally exposed FTSE 100 compared to the FTSE 250. Meanwhile, on a sector-specific basis, the Utility stocks have been among the best performers. Important to note that both, the telecoms and tech sector average had been skewed by the 1999 tech bubble, therefore, the tech sector only saw an average rise of 0.7% excluding 1999.

Across the FX space, the performance in the Pound during a hiking cycle has generally been higher vs USD, EUR and JPY. Therefore, with positioning in the Pound the most bearish in recent years, this will likely provide fuel to spark upside in the Pound against the Euro and Japanese Yen in the first few months of 2022. One caveat to add, however, be mindful of the increasing political risk for the Pound

UK ASSET PERFORMANCE 3M AFTER BOE LIFTOFF

Bank of England Hiking Cycle: FTSE 100, FTSE 250, GBP/USD, GBP/EUR Analysis

Source: Refinitiv

 

By Justin McQueen, Strategist, 23rd December 2021. DailyFX

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