Pound falls, recovers after BoE

BoE raises rates by 0.25%

The Bank of England raised rates by 0.25% today. The rate hike, the fifth in a row, brings the Bank Rate to 1.25%. The markets were not all that impressed with the BoE, as there had been hopes that the Bank might flex some muscle and raise rates by 0.50%. The modest 0.25% move indicates caution (some would argue undue caution) by Bailey& Co., and the pound fell over 100 points in the European session before recovering. This follows a banner day for the currency yesterday, when the pound shot up 1.48% in response to the Federal Reserve rate hike.

It’s worth noting that the Monetary Policy Committee (MPC) vote was 6-3, with the three dissenting members voting for a 0.50% hike. This indicates that there is considerable support at the MPC for more aggressive action, which could mean larger rate hikes if inflation doesn’t ease. The MPC statement noted that the Bank remains “particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response”.

The MPC gets high marks for flowery prose, but the end result was despite soaring inflation, members couldn’t muster more than a modest 0.25% rate increase. The BoE has essentially raised the white flag in the battle against inflation, as it has projected that inflation will top 10 per cent and has warned of a recession. The road ahead for the UK economy will be bumpy – GDP fell by 0.3% in April after a 0.1% decline in March, the first back-to-back contractions since March 2020, at the start of the Covid pandemic. The OECD has forecast that the UK economy will grow by 3.6% this year, but will stagnate in 2023, which would make it the worst-performing G-7 economy in 2023.

Federal Reserve serves 0.75% hike

There were no surprises from the Federal Reserve, which raised rates by 0.75%, to a target range of 1.50-1.75%. The Fed downgraded its US growth forecasts for 2022 and 2023, but insisted that there would be no recession. Some analysts would beg to disagree, but the financial markets were relieved, as Fed Chair Powell said he didn’t expect 0.75% rate hikes to become common. Risk sentiment jumped on the perception that the Fed rate hike will help curb inflation, and GBP/USD was sharply higher after the Fed announcement.

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GBP/USD Technical

• GBP/USD tested support at 1.2108 earlier today. Below, there is support at 1.1916
• There is resistance at 1.2215 and 1.2283

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