Last week, the Federal Reserve (Fed) raised interest rates by 75 basis points for the second month in a row. In July, the Bank of Canada (BoC) raised its rates by 100 basis points! Even the European Central Bank (ECB) surprised markets with a 50 basis point hike – knocking its key rate out of negative territory in one fell swoop.
This week, the Bank of England (BoE) is expected to join the heavyweights – raising rates by 50 basis points after raising rates by 0.25% five times in a row since December 2021. If it were a boxing match, small blows against inflation have been futile so the central bank is switching to mowers and uppercuts for the coup de grace! The key question is whether the BoE will embrace aggression or remain cautious on rates?
Before we discuss what to expect from the BoE this week, let’s take a quick look at GBPUSD.
Things look interesting for the currency pair on the weekly charts with price breaking out of the declining channel. A weaker dollar remains a key factor in the pound’s recent rebound. If the BoE hawks “go strong” on Thursday, it could propel the currency pair higher.
Down to down…
Beyond the sunny weather and frequent barbecues, a storm is brewing.
The outlook for the UK economy remains bleak due to a combination of negative themes.
Inflation soared, with consumer prices hitting 9.4% in June, a new 40-year high thanks to soaring food and energy prices. Rising prices are squeezing millions of households, impacting consumption, which remains a key driver of economic growth.
The latest PMIs aren’t looking too good, with manufacturing dropping to a 25-month low in July. Let’s not forget the political uncertainty and post-Brexit tragedies that add to the already toxic cocktail. In a nutshell, economic conditions remain unfavourable, with growing fears that the UK could slide into a recession.
Last June, the central bank signaled that it would “act forcefully” if the inflationary threat refused to dissipate. Traders are currently pricing in a 79% chance of a 50 basis point rate hike this month.
The coming week…
The main risk event for the pound will be the Bank of England’s rate decision on Thursday.
With markets expecting the bank to deliver its biggest rate hike in 27 years, much attention will be paid to the updated quarterly economic review and Governor Andrew Bailey’s press conference. Both could offer clues to central banks’ thoughts on inflation and the UK’s economic outlook. More details are also expected to be released on the central bank’s strategy to reduce its quantitative easing portfolio by £866bn.
Possible outcomes of the BoE meeting
- The BoE raises its rates by 50 basis points. The move could send the pound higher, but gains could be capped if the central bank pulls a “one and done” on aggressive rates with a cautious tone.
- The BoE hikes rates by 50 basis points and sings a hawkish note – fueling speculation around more aggressive hikes to come. Sterling rallies.
- The BoE is only raising rates by 25 basis points. Worries about the economic outlook are keeping hawks at bay, with the central bank postponing aggressive hikes until September or the fourth quarter. Pound tumbles over that decision.
GBP/USD to break above 1.2350?
GBPUSD turned bullish on the daily charts after prices conquered the 1.2060 lower high.
The bulls are clearly close with the next key point of interest at 1.2350. There were consistent higher highs and lower lows as the MACD moved above zero. A strong break and a daily close above 1.2350 could signal a move towards 1.2500 and 1.2650, respectively. If 1.2350 proves hard to break, prices may fall back towards the 50-day simple moving average and 1.2060, respectively.
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