Sterling falls below 1.23

The British pound has stabilized on Friday, after sustaining huge losses a day earlier. GBP/USD is trading at 1.2342 in the European session, down 0.11%. Earlier, the currency fell to 1.2276, its lowest level since June 2020.

BoE warning chills the pound

The BoE dutifully raised interest rates at its meeting on Thursday, but the market reception was a chilly one. GBP/USD plummeted a staggering 2.21% on the day. Investors gave a thumbs-down to the grim message from the central bank, as a fourth straight rate hike in as many meetings became an afterthought.

The BoE’s growth forecast for 2022 remained at 3.75%, but it slashed the 2023 projection from 1.25% to -0.25%. At the same time, the central revised upwards its inflation forecast for Q4 to above 10%, up from 8% in an April forecast. The ‘double-whammy’ of higher rates and a deteriorating economic outlook sent the British pound reeling after the BoE meeting.

The rate decision was a 6-3 vote, with all three dissenters voting in favor of a 0.50% rate hike. This surprised the markets, which had expected an 8-1 vote. There is a deep split in the MPC, with Governor Bailey acknowledging after the meeting that an uncertain economic outlook had led to a range of views in the MPC. Such a statement can hardly be expected to instill confidence in the markets.

In its policy summary, the BoE signalled that more rate hikes are coming, and also dropped the word “modest” to describe upcoming rate hikes. Yet the markets were not impressed  – the 0.25% was modest, and with the BoE warning about 10% inflation, it’s clear that it will take quite some time before rate hikes do the job and wrestle down sizzling inflation.

The US dollar initially lost ground after the Fed rate decision on Wednesday, as investors seized on Fed Chair Powell’s statement that the Fed was not considering a 0.75% rate hike. The greenback has since bounced back, as the markets digest that the Fed plans to be aggressive with further 0.50% hikes in its battle to bring down inflation.

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GBP/USD Technical

• There is resistance at 1.2612 and 1.2719
• GBP/USD tested support at 1.2272 in the Asian session. Below there is support at 1.2179

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