Bank of England Hike Interest Rates…… the devil is in the details……….

Bank of England – a huge day in the financial markets as the Bank of England hiked rates by 25 bps, following the US Federal Reserve’s move overnight, hiking interest rates by 50bps. Finally, global central banks are on the move and actively attempting to curb inflation, which in the case of the UK is forecasted to rise to 10% this year. Central Bank monetary action of course has its own knock-on effects and is currently causing large amounts of volatility in the currency markets – price action post the Bank of England hike this afternoon is a point in case.

It is fair to say that the Bank of England achieved its goal by hiking interest rates in a very dovish manner today. The initial headline on the wires appeared quite hawkish – a 6-3 vote to hike rates by 25 bps, meaning 3 members of the MPC voted in favour of hiking interest rates by 50 bps. As mentioned above, however, the devil was very much in the detail here and the MPC’s new projections on the economic outlook, inflation and terminal interest rates, all painted a very different picture.

Short term Chart – GBP/USD – immediate price action post-BOE – initial false rally in Sterling highlighted by the red circle and subsequent collapse.

The details of the MPC’s economic forecast paint a grim picture of the UK’s outlook. Although the Bank has an inflation forecast hitting its peak in the 4th quarter of this year, at 10%, it does forecast CPI dropping off below 2% by the 3rd year of its projections. This however may be down to the recession it now forecasts in 2023 and not a positive reaction to rate hikes – it sees the economy contracting by 0.25% next year. The Governor of the Bank of England, Andrew Bailey was equally pessimistic during the subsequent press conference – the stand out comment here has to be – Bailey – sees the largest contraction in real incomes since the data began in 1964.

As you can imagine, Sterling has taken a tumble this afternoon, as the UK’s Fixed Income market rallied hard – ie interest rate expectations came in lower. On the currency front, we have sold off versus the Dollar by over 1.5% and against the Euro just under 1.5%. We are now approaching levels in Cable (GBP/USD) not seen since the summer of 2020 – the height of the pandemic –

Long term chart of Cable – 1.2258 now looks very important support on the downside – red line

Versus the Euro, we have finally broken out of the yearly range that has defined us since January – albeit marginally – the 0.8510-20 zone. We would need a weekly close above here however to confirm the breakout. We would also like to point out that moves like this on a BOE rate decision days have not been sustained so far this year – so all eyes are on the close in EUR/GBP tomorrow evening.

Long term EUR/GBP chart – daily break out of yearly defining range – red line

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