The British pound is showing little movement for a second straight day, as GBP/USD trades just below the 1.25 level.
BoE expected to raise rates
Nobody can accuse the BoE of lacking an aggressive policy, although perhaps it should have done so earlier. The central bank has hiked rates at three straight meetings, and the streak is expected to continue at the May meeting on Thursday. The markets have priced in a 25-basis point hike, which would raise the Official Bank Rate to an even 1.00%.
The BoE’s hawkish stance hasn’t stemmed the pound’s plunge, with GBP/USD falling 4.31% in the month of April. I don’t expect the pound to get much relief after a 0.25% hike, and the risk to sterling remains tilted to the downside.
The primary driver behind the rate-hike cycle has been the urgency in dealing with soaring inflation, which hit 7% in March, a 30-year high. Like other central banks, the BoE faces the challenge of lowering inflation without choking off growth and sending the economy spinning into a recession. Governor Bailey recently acknowledged that the BoE is treading a “narrow path” between inflation and growth and has signalled that he will raise rates at a slower pace than the Fed, which is poised to raise rates by a half-point later today and possibly at upcoming meetings as well.
The Fed holds its policy meeting later today, and anything other than a half-point increase would be a huge surprise. A half-point increase has been priced in, but it is nevertheless a significant event. It will mark the Fed’s largest rate increase in 20 years and shows the Fed’s commitment to lower inflation. Investors will be monitoring the hawkishness of the rate statement, as well as the size of the trim to the Fed’s balance sheet (quantitative tightening), and an aggressive message from the Fed would likely boost the US dollar.
- GBP/USD faces resistance at 1.2612 and 1.2719
- There is support at 1.2379 and 1.2272
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