BoE’s dovish hike leaves pound in limbo

Fawad Razaqzada
By :  ,  Market Analyst

The Bank of England has decided to conform to market expectations and hike interest rates by 50 basis points to 4.00% in a 7-2 vote, as expected. In response, the GBP/USD edged higher to 1.2390 before plunging about 100 pips from there to a fresh session low as investors wondered whether the BoE was done with hiking. But the ongoing risk-on sentiment, and the dovish-leaning FOMC yesterday, meant that the downside for GBP/USD was limited for now.

While some of the headlines released sounded hawkish, it looks like investors have decided that the hiking might be paused here, perhaps after another 25-basis point hike in the next meeting.

Specifically, the key sentence in the policy statement was that “if” there are more persistent price pressures then “further tightening will be required". The line that had previously read “it will respond forcefully” on inflation, was removed.

However, it was not immediately clear if this meant a pause in hiking and thus a pivot from the BoE, or merely a slowdown in rate hikes. More details should emerge in the press conference which is about to get underway.

The BoE said CPI has likely peaked and expect inflation to fall quickly this year. But the Bank now sees a shorter, shallower recession than previously expected. The BoE’s updated forecasts are:

GDP Growth Forecasts:

  • 2023 GDP -0.5%, one percentage point higher than -1.50% expected previously
  • 2024 GDP -0.25% vs. -1.00% last

CPI Inflation Forecasts:

  • 2023 CPI: 4.00%, down from 5.25% previously
  • 2024 CPI: 1.50%, unchanged from previous estimate

 

By the way, the two doves on the committee Swati Dhingra and Silvana Tenreyro voted for no hike. But no more MPC members joined them, which is not super dovish and as wide a split as the December meeting – hence, the cable was clinging on to 1.2280 support at the time of writing.

GBP/USD

If sentiment towards risk assets remain supported, I would expect a bullish breakout above 1.2400 resistance in the not-too-distant future.

 

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