March 26, 2023
BoE could not help the Sterling.
Hot Forex Review

BoE could not help the Sterling.

On Thursday, just a day after FOMC, the delayed BoE meeting was held. According to the reports, there was not much unity among the members. While the Central Bank finally voted to increase the interest rate by 50 basis points, the division between the members in the vote to increase the interest rate from 25, 50, and 100 basis points seems worrying.

Three of the nine Monetary Policy Committee members, including Jonathan Haskel, Catherine Mann, and Dave Ramsden, voted for a more extensive hike of 75 basis points. In contrast, the newest member of MPC, Swati Dhingra, voted for a 25-basis points rate hike.

A weaker economic outlook and increasing inflation remain in focus.

A moderate BOE rate hike of 50 basis points weakened the Sterling even further, especially against the US dollar, after Wednesday’s 75 basis point rate hike by FED.

As mentioned earlier, the Bank of England raised its key lending rate by 0.5 percent to 2.25%, which was not observed in the last 14 years. It was not all; Central Bank in the UK also announced that they would start active sales of UK government bonds in October, which were bought during COVID-19 Quarantine.

All these decisions were made while we have a slower economy and increasing inflation. BoE increased the near-term outlook, and now, even thanks to the new government’s plans to cap energy prices for households and businesses, it is expected to peak at just under 11% in October, earlier than its previous forecasts, but warned that it would still take some months to fall back below 10%.

Given the weaker economic data and outlooks, a recession will be likely in the United Kingdom. If the government and Central banks cannot control the inflation, this recession will turn inflationary.

The Sterling continued its withdrawal seen in the last weeks, with the GBP/USD touching a 37-year low at 1.121. If the GBP/USD rate goes up, it may encounter resistance near the 1.14 level and higher up near 1.17, while in declines, under 1.140, which is 2020 low, we cannot name a specific number as a support, bears will have a long way to go.

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