Bank of England raises rates by 50 basis points
Despite the Bank of England’s rate hike of 50 basis points, the GBP/USD is trading near a 37-year low. Why? Because the Fed raised rates by 75 basis points yesterday and said more rate hikes are coming.
The Bank of England (BOE) raised rates by 50 basis points at today’s interest rate meeting to bring its key rate to 2.25%. Note, however, that the vote was not unanimous. Three members of the MPC voted to raise the rate by 75 basis points. Recall that at the last meeting of the Bank of England, the board indicated that inflation could peak above 13% in October. However, the MPC said today that the UK energy price guarantee will significantly limit further inflation and support demand compared to the August forecast. New Prime Minister Liz Truss recently announced a plan to cap annual energy spending at £2,500. Details of the plan, along with other tax cuts, are expected to be announced tomorrow. As a result, the committee cut its peak inflation forecast from 13% to under 11% and said a “deep” recession could be avoided. Moreover, remember that the MPC called for a fourth quarter recession that lasted about 5 quarters. The Bank of England pushed back the timetable as the central bank fears an additional public holiday due to Queens’ funeral will hit the economy and the UK is already in recession.
In addition to the rate hike, the Bank of England announced that it would begin liquidating its holdings in UK government bonds worth more than £80bn over the next 12 months.
After yesterday’s FOMC decision to raise rates by 75 basis points, it looks like GBP/USD may go down. The United States is raising rates aggressively without fear of a recession. The Bank of England is raising rates less aggressively and fears a recession has already begun. (Technically, the US had 2 periods of negative growth, but the Fed does not recognize this as a recession). Consequently, the GBP/USD pair went down. On the daily chart, the GBP/USD pair has been trading in a downward channel since the end of April, when the price was around 1.2843. After yesterday’s FOMC meeting, the pair tested the lower channel trend line and reached a new 37-year low at 1.1235. In addition, the price has formed a descending wedge, inside which the pair is trading inside today. GBP/USD hit a lower low at 1.1211 today, bouncing off the lower trendline of the wedge.
Source: Tradingview, Stone X
If GBP/USD continues lower, the first support level will be a 161.8% Fibonacci extension from the Sep 7 lows to Sep 13 highs near 1.1198. This is also the lower trend line of the wedge. If the price breaks lower, the next level of support will only appear at the 1985 lows at 1.0520. However, note that the RSI is diverging from the price in oversold territory, indicating that the pair may be poised for a bounce. If so, the first level of resistance is at today’s highs and the upper trend line of the wedge is near 1.1365. Above this level, the price could move to the previous support at 1.1410 and then to the Sept. 13 highs at 1.1738 (which is also the upside target of the falling wedge).
Despite a 50 basis point rate hike by the Bank of England, GBP/USD is close to a 37-year low. Why? Because the Fed raised rates by 75 basis points yesterday and said more rate hikes are coming. The pair appears to be continuing to fall, but a rebound is possible as the price action has formed a falling wedge which is bullish. However, as long as the Fed continues to raise rates more than the Bank of England, GBP/USD should continue to decline.
Joe Perry, CMT, FOREX.com » Official site
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