The BOE hiked interest rates by 50 bps, taking the bank rate to 1.75%. Both interest rate markets and the majority of economists had anticipated the move. Following the hike, the GBP/USD pair lost ground.
However, the markets did not expect downward revisions to the Bank of England’s UK GDP forecasts that now point to a technical recession starting in Q4 2022 and persisting throughout 2023 and, fresh inflation forecasts that point toward CPI inflation topping out at 13.1% in Q4 2022 and remaining persistently high before dropping sharply from Q3 2023.
Unsurprisingly, GBP/USD fell sharply on the news. At the time of writing, the pair was down by nearly 0.23% on the day to trade at 1.2115. Slower expected growth and persistently high inflation highlight the challenges the Bank of England faces in controlling inflation.
Weaker expected growth, in particular, raises serious questions about the central bank’s capacity to raise interest rates aggressively going forward. As a result, United Kingdom 2-Year yields ticked lower by 10 bps at one point during the day. Thursday’s 50 bps hike appears to be an attempt by the BoE to front load interest rate hikes now to avoid the chance of more aggressive hikes in the future. This suggests the BoE will struggle to keep pace with the Fed regarding policy tightening.
It’s not just the fundamentals that appear pessimistic GBP/USD. GBP/USD is trading well below its 200-period exponential moving average on the higher weekly or, the lower daily timeframe. Furthermore, from a market structure perspective, GBP/USD is still pointing to a clear downtrend since 2022 began.
Price is now sitting close to the halfway mark between the prior May corrective swing high of 1.22670 and July swing low of 1.17603, leaving the pair primed for further losses after Thursday’s decline. If the price breaks above the 1.26760 level, which has proven to be a strong pivot level, it might restore more confidence in the pair. Alas, at the moment, the market is far away from that level.
