Review of Bank of England Interest Rate Decision
GBP/USD may approach 1.25 if the BoE disappoints the markets.
The Bank of England is due to make a decision on Thursday. It’s not “to go or not to go”. Raise rates by 25 basis points or 50 basis points, that is the question.
In addition to the rate decision itself, the Bank of England’s comments on the economic outlook and future tightening, as well as voting results, will have a big impact on the British pound’s exchange rate.
Barring a massive sell-off in risky assets due to the Fed’s first policy decision on Wednesday, GBP/USD could rise to 1.25 if the BoE doesn’t offer a surprise.
What are analysts waiting for?
The already split Monetary Policy Committee is unlikely to win unanimous support as it plans to lower or continue at 50 basis points.
Markets are about 65% confident of a 50bps increase to 4.0%, largely due to high core inflation, stronger-than-expected wage growth and surprising resilience in the national and European economies.
Number of votes
The MPC is expected to vote 7-2 in favor of a 50 basis point increase. At the December meeting, Swati Dhingra and Silvana Tenreiro voted to keep the discount rate unchanged at 3%, while Katherine Mann chose to raise it by 75 bp.
Will the crack widen? Will others join the pigeon camp? If so, then this should be bad news for the pound.
The Bank of England is expected to revise its GDP upwards
As for the Bank of England comments on the economy, it will be interesting to see if the MPC will revise its GDP expectations upwards, especially against the backdrop of declining gas prices. But the focus will be on the bank’s inflation forecasts. With rising pressures on wages, this should keep inflationary pressures high, which could mean further rate hikes should be expected at future meetings.
GBP/USD to 1.25?
Will GBP/USD rise to 1.25 on a 50bp gain and some aggressive direction? This may already happen if the Fed prepares a pleasant surprise when deciding on monetary policy the day before. If so, then the Bank of England’s decision could further spur the rally.
Source: Tradingview, Stone X
But with the exchange rate already appreciating, the biggest risk is that the Fed and/or the BoE will not meet market expectations and our base case. If the Fed is more hawkish and the BoE is more dovish and divided than expected, this could lead to a GBP/USD correction towards 1.21 and possibly even lower!
Text: Fawad Razaqzada, FOREX.com » Official site
Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell any currency contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness and accepts no liability for any direct, indirect or consequential damages that may result from anyone relying to such information.