Market Overview

18 March 2022

BoE Put the Pound in the Red

The buildup and the decision of the U.S. Federal Reserve (Fed) to hike interest rates by a quarter percentage point for the first time since 2018 on Wednesday certainly affected the monetary policies of other central bankers, including the Bank of England (BoE). British monetary policymakers raised the base rate for a third time over a period of months, to 0.75% from 0.5%.

After this decision the Pound fell to the U.S. Dollar from 1.3200 to 1.3100 and at first sight this may seem to be paradoxical or controversial after such a rise. But there is solid logic behind it. The BoE’s decision was already discounted by the market as the Pound rebounded to 1.3150. The actual decision triggered traders to close long positions as no further hawkish messages were found in the BoE’s statement. Moreover, the British monetary policymakers deliberately indicated that some “modest” further interest rate hikes may be needed over the coming months, depending on the medium-term outlook for inflation. Many investors’ hopes were also dashed as they expected  the base rate to rise by 2% by the end of this year, something which may not seem so feasible now.

Moreover, the bank did not provide a solid opinion on further monetary tightening as the Monetary Policy Committee (MPC) voted 8-1 to increase base rate instead of securing all nine votes. Deputy Governor Jon Cunliffe disagreed with the majority by voting to keep interest rates on hold amid fears of significant pressure on demand from rising fuel costs.

The inflation factor caused a dual attitude towards a base rate change. British monetary policymakers suggest inflation may surge to 8% in April, or one percentage point above previous expectations, and also warned prices may go even higher by the end of the year. Russia-Ukraine military flareup may lead to a significant increase of global inflation pressure, which may further disrupt supply chains over the coming months, according to a MPC statement.

On one hand, there is every reason to tackle inflation by tightening monetary policy. But, on the other hand, prices are rising and causing soaring costs. And such reasons should be considered in a less aggressive manner.

Such circumstances and messages from the BoE may cause  a further slide of the GBPUSD as the Fed is indeed more aggressive now. Any rise of the GBPUSD to the strong resistance level at 1.3200-1.3250 could be considered as a possible chance to open short positions with the target at 1.3000.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Mark Goichmann
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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