BOE delivers a "dovish" 75bps hike

In contrast to the Fed, the Bank of England has said that the peak interest rate is likely to be lower than implied by financial markets. This was the main takeaway point from the just-released policy statement, as the BoE decided to hike interest rates by 75 basis points, lifting the OBR to 3.00% from 2.25% previously. There were 2 dissenters at the MPC, one (Dhingra) calling for a 50-bps hike, the other (Tenreyro) for 25. Overall, it had a “dovish hike” written all over it, and the initial reaction in the markets made sense. The FTSE bounced some 30 points off the lows while the GBP/USD fell to below 1.12 handle.

The BoE is worried that if it follows the interest rate projections of the market, this will cause a recession:

BOE SEES TWO-YEAR RECESSION IF RATES FOLLOW MARKET CURVE
BOE: PEAK INTEREST RATE LIKELY LOWER THAN IMPLIED BY MARKETS

With economic growth likely to be lower, inflation is likely to fall quicker. The BoE has therefore slashed its inflation forecasts:

One-year CPI forecast: 5.2% vs 9.53% in August
Two-year CPI forecast: 1.43% vs Aug 2.00% in August

The BoE’s decision comes hot on the heels of the FOMC meeting the day before, which saw the dollar power higher, and stocks lower. The BoE’s decision has been somewhat expected, with some analysts either calling for a smaller rate hike than expected or a lower terminal rate. The BoE has decided to opt for the latter, after hiking by 75 bps and signalling more hikes to come "albeit to a lower peak" than 5.2% priced into markets.

It was a totally different message to Jay Powell, the Fed Chair, who last night suggested that the terminal rate is going to be higher than previously anticipated, something which sent shockwaves across the financial markets as stocks, bonds and gold all tumbled.

Until the FOMC decision on Wednesday, the cable had been able to remain supported around the 1.15 handle after climbing sharply off its all-time lows in recent weeks, while the EUR/GBP and other pound crosses also stabilised, thanks to the somewhat positive political situation in the UK and calmer tone across the financial markets in general.

But in light of the dovish rhetoric from the BoE and hawkish message from the Fed, there is a risk we could see the GBP/USD start heading towards 1.10 handle, and potentially even lower. With the short-term bullish trend line and support at 1.1250 broken, the technical path of least resistance is certainly not to the upside right now.

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.