The Bank of England has followed the footsteps of the US Federal Reserve by hiking interest rates by 50 basis points, lifting the Official Bank Rate (OBR) to 3.5%, the highest since October 2008. The pound initially slipped below the $1.23 handle before bouncing back off the lows, while the FTSE barely reacted.
The pound’s initial downward reaction suggests the move was priced in. But what probably surprised investors is the split within the BoE. Two MPC officials, Tenreyro and Dhingra, voted to keep rates unchanged at 3% in a dovish move, while Mann voted for a bigger, 75 bps, hike. The other 6 agreed in line with market expectations to lift rates by 50bps.
The doves argue that 3% interest rate is “more than sufficient” to bring CPI back to target. The latest MPC projections suggest CPI has reached a peak, although it is still expected to “remain very high” in the coming months.
Interestingly, the Bank has removed the wording that "policy is not on a pre-set path" and the part on any changes to the "scale, pace and timing" to interest rates will depend on the outlook. Perhaps, this is an indication that rate hikes will slow down moving forward. But it notes that further increases in the bank rate may be required, due to evidence that could indicate greater persistence of inflation.
After the Fed was a bit more hawkish than expected the day before, the US dollar has risen across the board. Thus, some of today’s weakness in the GBP/USD can be attributed to the dollar strength.
In any case, it is all about the about the 1.2290/1.2300 area for the cable, which is being tested from above after this week’s breakout. If the GBP/USD holds above this area on a daily closing basis then the bullish trend will remain intact. Failure to hold here, however, would be a bearish outcome. For confirmation, a move below recent low and the 200-day average around 1.2105 would be ideal from a bearish point of view.
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