Hawkish Bank of England (BoE) Hikes Rates by 0.25%, Sterling Jumps

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Bank of England and GBP/USD Price, Chart, and Analysis

• The BoE increases UK interest rates by 25 basis points.
• BoE to start unwinding its GBP895 billion quantitative easing program.

*** Updates ***

Sterling rose sharply post-BoE release with cable (GBP/USD) trading as high as 1.3620 from 1.3565 pre-release, while EUR/GBP fell to 0.8285 from 0.8330 before the announcement. The FTSE 350 banks index - bank profitability increases with higher interest rates - jumped by over 1% to 3595, its highest level since early 2020. In the gilt market, the interest rate sensitive 2-year added 10 basis points to yield 1.14%, while the yield on the benchmark 10-year gilt rose by 11 basis points to 1.3675%. Money markets are now expecting the UK base rate to hit 1% in May.

*** Updates to Follow ***

The Bank of England hiked interest rates by 25 basis points to 0.50% today as the central bank looks to get to grips with stubbornly high UK inflation. The 5-4 vote to hike showed a very hawkish twist with four MPC members looking to hike by 50 basis points today. Today’s interest rate increase, widely expected, follows the 15 basis point hike in mid-December 2021. UK inflation is currently running at 5.4%, up from 5.1% in December, and at a multi-decade high. The BoE today said that its expects inflation to hit 7% in the spring before falling back. The UK jobs market should be no impediment for further rate hikes with the unemployment rate currently at 4.2% as UK companies struggle to hire amid record job vacancies.

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Sterling jumped back above 1.3600 against the US dollar, building on its recent rally.

GBP/USD Three Minute Price Chart – February 3, 2022

Retail trader data show 48.45% of traders are net-long with the ratio of traders short to long at 1.06 to 1. The number of traders net-long is 6.95% lower than yesterday and 5.10% lower from last week, while the number of traders net-short is 6.55% higher than yesterday and 8.75% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bullish contrarian trading bias.

 

Feb 3, 2022 |  Nick Cawley, Strategist. DailyFX