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Focus on Bank of England

Despite the strong expectations that today the Bank of England will be more strict than the American Federal Reserve Bank, the gains of the upward rebound of the GBP/USD currency pair were not as much as the gains of the Euro/Dollar due to the expectations of the European Central Bank raising the same amount. This confirms that the gloomy outlook for the British economy means that the sterling does not benefit much from the upcoming Bank of England announcement. The pair of currency sterling / dollar settles around the level of 1.2392 a quarter of a point for the American interest rate from the Federal Reserve Bank.

The Federal Reserve raising US interest rates by 25 basis points is the central bank’s first challenge to the pound, dollar, and euro this week. The 25 basis point hike is well-expected, so the surprises lie in guidance as to whether this is the last hike in the cycle due to lower inflation, or whether more hikes are needed.

With market prices showing that investors are fully priced in now that this is the final measure, the upside risk to the dollar lies in the signal that more upside is needed to strongly beat US inflation. Another divergence on this topic would see the Fed push hard on expectations of a rate cut later in 2023 in response to a slowing economy. Success in lifting expectations that US interest rates will remain “high for longer” could lead to a rise in the dollar, but this did not happen. For their part, the strategic analysts at TD Securities say that the selling of the dollar has “extended” and “parts of the foreign currencies are showing signs of rising fatigue.”

This increases the likelihood of any near-term support for the dollar as trades unravel in response to any repricing of future interest rate hike expectations. Although the dollar may be vulnerable to a setback in the near term, most currency analysts believe that the strength may be short-lived.

The Bank was expected by markets to raise interest rates by 50 basis points, but expectations for 25 basis points have risen amid fresh signs that Britain’s economy is slowing under the weight of previous interest rate hikes.

Sterling has underperformed since money and credit figures showed mortgage approvals falling back to near post-financial crisis levels in December as other forms of lending contracted and the money supply shrank. Tuesday’s data was interpreted by some analysts as a possible reason for the Bank of England to raise the bank rate by less than half a percentage point, which would overturn the consensus of a 0.5% to 4% increase, although it is not clear why light of the other factors. Data is emerging from the UK over recent weeks.

Other data recently highlighted rising service sector inflation and accelerating wage growth while gross domestic product figures suggested the UK economy did not slow as much or as quickly as the Bank of England had predicted in its November forecast.

Expectations of sterling against the US dollar today:

  • Despite the strong decline of the US dollar against the rest of the other major currencies, the rebound gains of the GBP/USD currency pair against the US dollar did not reach the level of the dollar’s weakness.
  • This confirms our view that the sterling was sold from every rising level with the interest rate hike from the Bank of England as expected.
  • The closest sell levels for the currency pair are currently 1.2430 and 1.2565 respectively.
  • According to the performance on the chart for today’s time frame, the movement of the sterling/dollar pair towards the support level of 1.2185 confirms the downward shift and the end of any upward aspirations.

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