BoE lifts interest rates to highest since 2008

MPC hiked by 25 bps hike as expected, in 7-2 vote
More rate rises to come if inflation does not go down
Pound shows modest positive response

Before today’s Bank of England interest rate decision, traders had started to re-price a 25-basis point rate hike, after last week’s debacle in the banking sector triggered a coordinated central bank response, which eased those concerns. While fears over financial stability risks have not eased completely, traders knew that the BoE had the option to use targeted measures to address those risks like it did during the mini-budget crisis of last year and can use more traditional measures (changing the Bank Rate) to continue its fight against inflation. So, investors were pretty confident that a rate hike was forthcoming today.

Lo and behold, the BoE decided to hike interest rates by 25 basis points, lifting the Bank Rate to 4.25%, as had been widely expected.

How did the pound and FTSE react to the BoE’s decision?

Well, as we had indicated previously, a 25-basis point rate hike was mostly priced in, especially in light of the latest inflation data that was released on Wednesday and the corresponding positive reaction in the pound.

So, in terms of the immediate reaction, the pound edged up only slightly, while the FTSE also slipped a few points, before rebounding again.

However, it was never just the rate decision itself that was going to impact sterling. The split of the votes was always going to count, as too would the language the BoE used in terms of forward guidance.

In this regard, the split was 7-2, with Tenreyro and Dhingra voted to keep rates unchanged. The fact that they were not joined by other members meant that, on balance, this was slightly hawkish, than some would have expected just last week.

But after that hot inflation report we saw on Wednesday, there was no major shocks in the market, like the BoE’s last meeting in February, when the pound plunged after the central bank hinted it would pause rate hikes soon.

Instead, the BoE’s decision has surprised absolutely not many people. It is also hardly surprising that the BoE has repeated the phrase that "if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required." In terms of the banking sector, the BoE has stated that the FPC’s assessment is that UK banking system is “resilient.”

BoE’s rate decision concludes a busy week for GBP/USD

Ahead of the Bank of England’s rate decision, the GBP/USD had been on the rise, helped by both the pound finding strength and the US dollar weakening across the board.

The cable hit its best level since early February, after an unexpected acceleration in UK CPI to 10.4% cemented expectations over a 25-basis point BoE rate hike. Oher pound crosses rose across the board. Sterling had also held its own better than some of the other currencies impacted by the troubles in the banking sector thanks to the perception that the UK’s financial services are better insulated from the crisis.

The GBP/USD pair then found additional support from the Federal Reserve’ “dovish rate hike” on Wednesday. Traders sold the US dollar across the board after the Fed said it “anticipates that some additional policy firming may be appropriate,” omitting prior language forecasting “ongoing increases” in inters rates. However, the GBP/USD then came off its best levels along with other USD pairs after Powell dismissed market pricing of rate cuts this year.

The cable needs to break 1.2350 resistance if it wants to pave the way for 1.25 next. However, a drop below 1.2200 support first would be a bearish move.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.