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GBP/USD stuck below December highs as BoE meeting approaches


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As Andrew Bailey and co gear up for their next BoE decision, will it be enough to drive the pound higher against the dollar, or could recession worries return?

GBP banknoteSource: Bloomberg
 

 Chris Beauchamp | Chief Market Analyst, London | Publication date: Tuesday 31 January 2023 

What do markets expect from the Bank of England meeting?

This Thursday sees the latest Bank of England (BoE) decision. Markets expect the bank to raise UK rates by 50 basis points (bps), a similar amount to the ECB.

What is the context?

In an interesting reversion to early 2022, when the BoE seemed to lead the way in hawkishness, this week’s crop of central bank meetings points to a Fed rate increase of just 25bps, while Threadneedle Street pushes on with another 50bps hike, as will the European Central Bank.

As with most central bank meetings these days, it is the comments around the decision and the voting pattern that will be more important. A more hawkish caucus might emerge, based on the improved (or at least, less bad) economic outlook that has appeared of late.

But the outlook for the second half of the year remains gloomy, at best. Markets continue to expect at least one 25bps rate cut by the end of the year, but the bank will not want to give too much credit to this argument, since it is aware that inflation remains solidly above forecasts.

GBP/USD outlook

Momentum in GBP/USD has stalled at the December highs of $1.24, with little sign that the price wishes to push on ahead of the BoE meeting.

Clearly a more hawkish BoE would be needed, but one that is not too hawkish that it then makes markets fret about the impact on the already-tough UK economic outlook.

It will be a tough balance to strike, and if markets start to worry about a deeper UK recession, then we could see GPB/USD push back towards $1.20 and the 200-day SMA.

GBPUSD chartSource: ProRealTime
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