Jump to content

Pound to struggle even if BoE goes for hawkish rate hike

Recommended Posts

This week’s BoE meeting could be crucial for the current bounce in GBP/USD, should be bank be more cautious about the outlook for the UK economy

BG_bank_of_england_boe_london_080980.jpgSource: Bloomberg
 Chris Beauchamp | Chief Market Analyst, London | Publication date: Wednesday 02 November 2022 

This week sees the Bank of England (BoE) meet once again, and markets expect a 75bps rate hike, taking interest rates to 3%, another post-financial crisis high.

What will the bank do?

Markets are generally united in expecting a 75bps increase in rates. Inflation hit an annual rate of 10.1% in September, around five times the 2% target rate set by Threadneedle Street. This argues for another sharp rise in rates, and more to follow.

Markets still expect the interest rate to peak around 5% in 2023, before the bank heads towards a series of rate cuts to stimulate the economy. But a UK recession seems inevitable at this point, and the bank itself expects it to last around five quarters. To continue tightening into such an event would seem like the height of folly.

What comes next?

Instead, this time around could see just a 50bps rise, and perhaps another 25bps rise before the end of the year. High mortgage rates, the end of the political ‘crisis’ of September and October and reduced inflation expectations could mean a shift away from such hawkish policy.

This might be indicated by a strengthened dovish caucus on the Monetary Policy Committee (MPC); while all the nine members voted for a rate increase in September, and three wanted to raise by 75bps and not 50bps, only one member wanted a 25bps rise. But with the economy slowing, or likely to slow, we could see more members this time around vote for a smaller increase.

A lot will be driven by the forecasts for the year ahead. Indeed, a downgrading of already weak growth outlooks would give the doves on the MPC a reason to be more forceful.

What will be the impact on sterling?

While much (if not everything) in GBP/USD depends on what the Fed does the day before the meeting, a more dovish/cautious BoE would likely put further pressure on sterling.

Indeed, the rally from the September lows perhaps increases the likelihood of a revival of the downtrend. Now more optimistic forecasts for the UK economy and a hawkish Bank of England are priced in (or to look at it the other way, a more dovish Fed has been priced in). Should the MPC be more cautious, then we should expect further weakness in the pound, building on the small retreat from $1.16 we have already seen.

This would then test trendline support from the September low, and signal that a fresh leg to the downside has begun. A surprise-hawkish BoE provides more energy for the current counter-trend bounce, and might result in a move back towards the $1.17 area.

GBPUSD_021122.pngSource: ProRealTime
Link to comment

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
  • image.png

  • Posts

    • ADI Elliott Wave Analysis Trading Lounge Daily Chart, Analog Devices Inc., (ADI) Daily Chart ADI Elliott Wave Technical Analysis FUNCTION: Trend MODE: Impulsive STRUCTURE: Motive POSITION: Minor wave 3 DIRECTION: Top in 3.   DETAILS: Looking for continuation higher towards medium level at 250$. We have a nice alternation between a sideways wave {iv} and a sharp wave {ii}.   ADI Elliott Wave Analysis Trading Lounge 4Hr Chart, Analog Devices Inc., (ADI) 4Hr Chart ADI Elliott Wave Technical Analysis FUNCTION: Trend MODE: Impulsive STRUCTURE: Motive   POSITION: Wave {v}. DIRECTION: Upside in wave {v}. DETAILS: We seem to have completed the correction in wave {iv} with a clear three wave structure. Looking for continuation higher into equality of {v} vs. {i} at 254$.   Welcome to our latest Elliott Wave analysis for Analog Devices Inc. (ADI) as of June 19, 2024. This analysis provides an in-depth look at ADI's price movements using the Elliott Wave Theory, helping traders identify potential opportunities based on current trends and market structure. We will cover insights from both the daily and 4-hour charts to offer a comprehensive perspective on ADI's market behavior.   * ADI Elliott Wave Technical Analysis – Daily Chart* In our Elliott Wave analysis of Analog Devices Inc. (ADI), we observe an impulsive trend pattern characterized by a motive structure. ADI is currently positioned in Minor wave 3, indicating a continuation higher towards the medium level at $250. The wave structure shows a clear alternation between a sideways wave {iv} and a sharp wave {ii}, which is a typical feature in Elliott Wave theory, suggesting healthy trend progression. Traders should monitor for the top in Minor wave 3 and the potential transition into wave {v}, which could offer opportunities for profit-taking or strategic adjustments to long positions.   * ADI Elliott Wave Technical Analysis – 4Hr Chart* On the 4-hour chart, ADI continues to follow an impulsive trend mode within a motive structure, specifically in wave {v}. The recent correction in wave {iv} appears to have completed with a clear three-wave structure, indicating a possible resumption of the uptrend. The target for wave {v} is set at the equality of {v} vs. {i} at $254. Traders should look for confirmation of this upward movement as the wave {v} progresses towards the target level, which may present opportunities for entering long positions or adding to existing ones.   Technical Analyst : Alessio Barretta Source : Tradinglounge.com get trial here!  
    • Asian shares rose to a one-month high on Wednesday, led by a rally in tech stocks like Nvidia which surpassed Microsoft to become the world's most valuable company. The dollar was steady as soft US retail sales data reinforced expectations of the Federal Reserve cutting interest rates later this year. Markets are pricing in around 48 basis points of rate cuts by the Fed in 2024. Trading is expected to be muted due to the US markets being closed for the Juneteenth holiday on Wednesday. Oil prices were steady, with Brent crude around $85 per barrel and WTI crude near $81.5 per barrel. UK inflation slowed to 2% year-on-year in May, from 2.3%, and held at 0.3% month-on-month. Core CPI slowed to 3.5% YoY from 3.9%. 
    • Alpha Trade is about to launch a sub-brand - Alpha Trade Seychelles In order to better meet the more segmented requirements of investors in the investment field, we are pleased to announce that at the end of summer 2024, we will launch a sub-brand regulated by Seychelles - Alpha Trade Seychelles. We are currently selecting the office address and finalizing the relevant management personnel. We believe that in a short time, we will be able to launch Alpha Trade Seychelles to provide investors with better and more diversified services. As a global high-quality liquidity provider, Alpha Trade's meticulous and customized liquidity service solutions have long been recognized by a wide range of investors and brokers. With the establishment of Alpha Trade Seychelles, our products will be richer, with more free leverage options and more liquidity docking, which will make it easier to meet the execution of investors' diversified strategies and shorten the execution time, which will help investors get better quotes in strategy operations.
  • Create New...