The Bank of England (BoE) joined the throng of major central banks in hiking interest rates by +25 basis points today. However, whilst other central banks seem to be close to the end of their tightening, with inflation yet to be tamed, the BoE seems set to continue hiking. The prospect of higher rates in the meetings in the meetings to come has been sustained. This is helping to prop up the performance of GBP on major forex.
- GBP hikes again, with the MPC remaining firmly on course for more to come
- Economic projections come with a hawkish lean
- GBP is rallying again on its major crosses, but will this continue?
BoE hikes again, more to come
The Reserve Bank of Australia, the Federal Reserve and the European Central Bank all hiked interest rates by 25 basis points last week. Now the Bank of England has joined the party as it also increased its Base Rate by 25 basis points to 4.50%.
The message from the Bank of England today was that there is also likely to be more tightening to come.
“Inflation risks are skewed significantly to the upside”
Whilst energy prices have eased, there are continued worries over food price inflation. There is more work needed to bring inflation under control.
According to Bloomberg, the implied rate for the Bank of England in money markets suggests that there will be another hike in June to 4.75%, with the potential then for one more hike to 5.00%. The tone of the decision today would suggest that we are still on course for this to be about right.
The MPC voting for today’s decision came with a 7-2 split. Two dissenting voices were dovish, calling for rates to be held steady. However, interestingly, the arch-dove on the Monetary Policy Committee, Silvana Tenreyro, who had previously discussed the prospect of perhaps voting for a rate cut still voted to maintain rates at 4.25%.
So, the balance of the voting looks to be towards further hikes. I always tend to like the Bloomberg graphics and this one depicts the continued hawkish bias on the MPC.
Interestingly also, the BoE suggested that the UK banking system was looking fairly stable in the wake of the strains recently seen in the global banking system, noting that the economic impact was “only small”.
However, one of the key takeaways was that the UK seems set to avoid recession. Having previously predicted a recession that would last more than a year, the economic projections seem to now be suggesting that the UK may continue to grow.
BoE projections come with a hawkish lean
The economic projections made for interesting reading, even also coming with a slightly positive/hawkish lean. Now, being British, I find this positive bias to be slightly unnerving, however, it seems as though the BoE was previously overly pessimistic. Now, don’t get me wrong, the sunlit uplands are still a long way off, but this is at least a welcome assessment of the UK economy.
Here we see the table of projections:
A few points of note:
- The negative growth of 2023 and 2024 are being revised into mildly positive GDP, along with a slight upward revision too for 2025.
- Inflation is set to fall, but over the next 12 months, it will take longer to reduce. Elsewhere in the monetary policy report, the BoE talks about inflation at 7% by mid-2023.
- Interest rate projections have been revised higher. So, higher for longer.
Taking all three of these factors together and we see that these are mildly hawkish. This should be supportive for GBP performance.
GBP stands firm on its crosses
GBP has had a strong run of outperformance on several of its major crosses in recent weeks. Performance against the USD has begun to wane slightly, although GBP is not alone in that regard. Despite this though, the performance still seems to be holding up relatively well.
The strength is especially showing against the EUR, with the EUR/GBP cross having broken through a key floor of support recently as the EUR has fallen away. With the support that today’s BoE decision gives GBP and the less hawkish tone from the ECB last week weighing on the EUR, this opens the path for further EUR/GBP weakness.
Looking at the technical analysis, the chart shows the old support around 0.8689/0.8758 which has been broken since the ECB meeting. This is now a basis of resistance. B+The breakdown, which was confirmed on the daily RSI opens the path towards a test of the 0.8545/0.8580 support from October/November.
On a technical basis though, the one GBP cross that is not looking so assured anymore is on GBP/JPY. The strong move higher which found resistance around the old October high just above 172 is increasingly posting corrective signals. Now, this could be a case of markets looking less risk positive, but there is a potential correction forming.
There have been two bearish outside days in the past two weeks, and the cross is falling again today. The daily RSI is leading a possible downside break of the support at 168.03 and if this is broken on a closing basis it could open for a deeper move back towards 165.40. The resistance of yesterday’s lower high at 171.16 is becoming increasingly important now.
