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

    • We are currently being treated to a new generation of metaverses and gaming, where AI agents compete with each other, interact, and support human actors. As AI and NFT innovations refine further, the team of Altered State Machine (ASM) has come up with a decentralised protocol for creating ownership of an AI agent via an NFT.   The team understands that NFTs are another ground-breaking use case for blockchains, while Artificial Intelligence will be the heartbeat for the next wave of online experiences, including gaming, art and commerce. Hence they've built ASM to facilitate the creation of Agents for games, financial applications, virtual assistants, online worlds, etc.   Designed with the vision to be the protocol for ownership and monetisation of A.I.'s using NFT technology, Altered State Machine provides any application such as game, metaverse etc the ability to create A.I. Agents which are owned as an NFT. Its use cases range from Game players / characters to Metaverse assistants, DeFi trading bots, Chatbots, Digital twins (e.g. "Super Siri") and Advertising.   ASM ecosystem is governed by a robust token, ASTO, which is primarily used to enable the DAO to manage and grow the ASM ecosystem over time, and can also have transactional uses within the ecosystem. Other use cases may include: Governance (creating proposals for, and voting in the ASM DAO), AI Agent Training, Minting Agent NFTs within ASM universe world, Minting Agent NFTs within non-ASM universe worlds, Powerups, instant improvements, items and skins.   By holding ASTO, users will be able to access various features and in turn earn rewards for using their tokens, and also for their engagements within the ecosystem. Interestingly ASTO token trading opened on Bitget on 26th Feb, with an ongoing deposit to earn event to incentivize depositors.   Aren't you excited about the future of AI and NFT innovations with projects like this?
    • It's common knowledge that copy trading can yield lucrative returns with the right approach, and Bitget exchange has streamlined the process by offering access to top-tier traders to emulate.
    • The introduction of Altered State Machine (ASM) marks a significant development in the NFT space, introducing novel applications through AI integration. Collaborations with industry leaders like FIFA and Non Fungible Labs highlight the project's potential for success, especially with the forthcoming listing of $ASTO on Bitget exchange.
  • Create New...