GBP Breaking News: BoE Defies Market Estimates with 50bps Rate Hike
POUND STERLING TALKING POINTS
- GBP finds support post-BoE.
- Fundamental headwinds mount for UK and pound.
BANK OF ENGLAND RATE HIKE SEES POUND BID… FOR NOW
The Bank of England (BoE) surprised many markets participants with a 50bps interest rate (see economic calendar below) adjustment while money markets showed pricing skewed towards a 75bps increase. While this decision was marginal with only one vote resulting in the now 2.25% mark (5-4 split), 3 members including MPC members Mann, Ramsden and Haskel were in favor of a 75bps hike.
GBP/USD ECONOMIC CALENDAR
Source: DailyFX Economic Calendar
WHAT DOES THIS MEAN GOING FORWARD?
Money markets now reflect another 50bps increase for November with December pricing Largely unchanged for now. The challenges impacting the BoE at present is a weakening pound, fiscal policy capping energy prices short-term, a technical recession with 2 consecutive quarters of GDP contraction and a hawkish Federal Reserve. The fiscal support from the UK government may steady inflationary pressures short-term but should effect higher inflation in the medium to long-term making loose monetary policy extremely difficult to justify should the need arise – potentially in a recessionary environment.
BOE INTEREST RATE PROBABILITIES
GBP/USD DAILY CHART
Chart prepared by Warren Venketas, IG
Unexpectedly, GBP/USD bulls reacted favorably to the slightly ‘dovish’ news but I attribute this to yesterday dollar buying which may be seeing some profit taking as long dollar positioning remains quite crowded. I expect this to be relatively short-term as the greenback is the preferable global currency at the moment and moving towards the end of 2022 (should current fundamentals factors remain).
Key resistance levels:
- 20-day EMA (purple)
Key support levels:
BEARISH IG CLIENT SENTIMENT
IG Client Sentiment Data (IGCS) shows retail traders are currently LONG on GBP/USD, with 79% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment, resulting in a short-term downside bias.
Contact and followWarrenon Twitter:@WVenketas
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.